================================================================================
United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
[ x ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 001-12138
PDV America, Inc.
(Exact name of registrant as specified in its charter)
Delaware 51-0297556
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
750 Lexington Avenue, New York, New York 10022
(Address of principal executive office) (Zip Code)
(212) 753-5340
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of each Exchange on which registered
------------------- -----------------------------------------
7-3/4% Senior Notes, Due 2000 New York Stock Exchange, Inc.
7-7/8% Senior Notes, Due 2003 New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes_x_ No___
Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K:
Not Applicable
Aggregate market value of the voting stock held by non-affiliates of the
registrant: Not Applicable
Number of shares of Common Stock, $1.00 par value, outstanding as of
March 1, 2000: 1,000
DOCUMENTS INCORPORATED BY REFERENCE: None
================================================================================
<PAGE>
PDV AMERICA, INC.
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 1999
<TABLE>
<CAPTION>
TABLE OF CONTENTS
- -------------------------------------------------------------------------------------------------------------------
Page
<S> <C>
FACTORS AFFECTING FORWARD LOOKING STATEMENTS.....................................................................ii
PART I
ITEMS 1. and 2. Business and Properties.......................................................................1
ITEM 3. Legal Proceedings............................................................................17
ITEM 4. Submission of Matters to a Vote of Security Holders..........................................18
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters........................19
ITEM 6. Selected Financial Data......................................................................19
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........20
ITEM 7 A. Quantitative and Qualitative Disclosures About Market Risk...................................27
ITEM 8. Financial Statements and Supplementary Data..................................................30
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.........30
PART III
ITEM 10. Directors And Executive Officers Of The Registrant...........................................31
ITEM 11. Executive Compensation.......................................................................31
ITEM 12. Security Ownership of Certain Beneficial Owners and Management...............................31
ITEM 13. Certain Relationships and Related Transactions...............................................31
PART IV
ITEM 14. Exhibits, Financial Statements and Reports on Form 8-K.......................................35
</TABLE>
i
<PAGE>
FACTORS AFFECTING FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K contains certain "forward looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Specifically, all statements under the captions "Items 1 and 2 - Business and
Properties" and "Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations" relating to Year 2000 matters, capital
expenditures and investments related to environmental compliance and strategic
planning, purchasing patterns of refined products and capital resources
available to the Companies (as defined herein) are forward looking statements.
In addition, when used in this document, the words "anticipate", "estimate",
"prospect" and similar expressions are used to identify forward-looking
statements. Such statements are subject to certain risks and uncertainties, such
as increased inflation, continued access to capital markets and commercial bank
financing on favorable terms, increases in regulatory burdens, changes in prices
or demand for the Companies' products as a result of competitive actions or
economic factors and changes in the cost of crude oil, feedstocks, blending
components or refined products. Such statements are also subject to the risks of
increased costs in related technologies and such technologies producing
anticipated results. Should one or more of these risks or uncertainties, among
others, materialize, actual results may vary materially from those estimated,
anticipated or projected. Although PDV America, Inc. believes that the
expectations reflected by such forward looking statements are reasonable based
on information currently available to the Companies, no assurances can be given
that such expectations will prove to have been correct.
ii
<PAGE>
PART I
ITEMS 1. and 2. Business and Properties
Overview
PDV America, Inc. ("PDV America" or the "Company" and, together with
its subsidiaries, the "Companies") was incorporated in 1986 in the State of
Delaware and is a wholly owned subsidiary, effective April 2, 1997, of PDV
Holding, Inc. ("PDV Holding"), a Delaware corporation. The Company's ultimate
parent is Petroleos de Venezuela, S.A. (together with one or more of its
subsidiaries, referred to herein as "PDVSA"), the national oil company of the
Bolivarian Republic of Venezuela. Through its wholly owned operating
subsidiaries, CITGO Petroleum Corporation ("CITGO") and PDV Midwest Refining
L.L.C. ("PDVMR") (see below), PDV America refines, markets and transports
petroleum products, including gasoline, diesel fuel, jet fuel, petrochemicals,
lubricants, asphalt and refined waxes, mainly within the continental United
States east of the Rocky Mountains.
Prior to May 1, 1997, the Company had a 50% interest in The UNO-VEN
Company ("UNO-VEN"), an Illinois general partnership. As of May 1, 1997,
pursuant to a Partnership Interest Retirement Agreement, certain UNO-VEN assets
were transferred to PDMVR. Accordingly, the Company's consolidated financial
statements reflect the equity in earnings of UNO-VEN through April 30, 1997
(Consolidated Financial Statemens of PDV America - Note 8 of Item 14a), the
results of operations of PDVMR on a consolidated basis since May 1, 1997 and the
financial position of PDVMR at December 31, 1998 and 1999. See "--PDV Midwest
Refining, L.L.C."
1
<PAGE>
PDV America's aggregate net interest in rated crude oil refining
capacity is 858 thousand barrels per day ("MBPD"). The following table shows the
capacity of each U.S. refinery in which PDV America holds an interest and PDV
America's share of such capacity as of December 31, 1999.
PDV America Refining Capacity
<TABLE>
<CAPTION>
Net PDV
Total Rated America
Crude Ownership In
PDV America Refining Refining
Location Owner Interest Capacity Capacity
-------------------------- -------------- -------------- --------------
% MBPD MBPD
<S> <C> <C> <C> <C>
Lake Charles, LA CITGO 100 320 320
Corpus Christi, TX CITGO 100 150 150
Paulsboro, NJ CITGO 100 84 84
Savannah, GA CITGO 100 28 28
Houston, TX (1) LYONDELL-CITGO 41 265 109
Lemont, IL PDVMR 100 167 167
-------------- --------------
Total Rated Refining
Capacity as of December 31,
1999 1,014 858
============== ==============
- --------------------
<FN>
(1) Initial interest acquired on July 1, 1993. CITGO has a one-time option,
exercisable after January 1, 2000 but not later than September 30, 2000, to
increase for an additional investment, its participation interest up to a
maximum of 50%. See "CITGO-Refining-LYONDELL-CITGO". See also "Factors
Affecting Forward Looking Statements".
</FN>
</TABLE>
The following table shows sales revenues and volumes of PDV America for
the three years in the period ended December 31, 1999.
PDV America Sales Revenues and Volumes
<TABLE>
<CAPTION>
Year Ended December 31, Year Ended December 31,
1999 1998 1997 1999 1998 1997
------------- ------------- ------------- ------------- ------------- --------------
($ in millions) (MM gallons)
<S> <C> <C> <C> <C> <C> <C>
Gasoline $7,691 $ 6,252 $ 7,754 13,115 13,241 11,953
Jet fuel 1,129 828 1,183 2,198 1,919 2,000
Diesel/#2 fuel 2,501 1,945 2,439 5,057 4,795 4,288
Asphalt 338 300 398 753 774 749
Petrochemicals and industrial
products 1,041 952 1,178 2,306 2,658 1,961
Lubricants and waxes 482 441 467 285 230 239
------------- ------------- ------------- ------------- ------------- --------------
Total refined product
sales $13,182 $10,718 $13,419 23,714 23,617 21,190
Other sales 150 242 203 - - -
------------- ------------- ------------- ------------- ------------- --------------
Total sales $13,332 $10,960 $13,622 23,714 23,617 21,190
============= ============= ============= ============= ============= ==============
</TABLE>
2
<PAGE>
The following table shows PDV America's aggregate interest in refining
capacity, refinery input and product yield for the three years in the period
ended December 31, 1999.
PDV America Refinery Production (1)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------
1999(2) 1998(2) 1997(3) (4)
----------------------- ----------------------------------------------
(MBPD, except as otherwise indicated)
<S> <C> <C> <C> <C> <C> <C>
Rated Refining Capacity at year end 858 858 853
Refinery Input
Crude oil 753 84% 763 83% 675 81%
Other feedstocks 146 16% 159 17% 159 19%
----------- ----------- ----------- ----------- ---------- -----------
Total 899 100% 922 100% 834 100%
=========== =========== =========== =========== ========== ===========
Product Yield
Light fuels
Gasoline 401 44% 413 44% 381 45%
Jet fuel 72 8% 69 7% 68 8%
Diesel/#2 fuel 173 19% 175 19% 144 17%
Asphalt 42 5% 45 5% 42 5%
Petrochemicals and industrial products 219 24% 231 25% 206 25%
----------- ----------- ----------- ----------- ---------- -----------
Total 907 100% 933 100% 841 100%
=========== =========== =========== =========== ========== ===========
Utilization of Rated Refining Capacity 88% 89% 79%
- --------------------
<FN>
(1) Includes all of CITGO refinery production, except as otherwise noted.
(2) Includes a weighted average of 41.25% of the Houston refinery for 1999 and 1998.
(3) Includes a weighted average of 34.44% of the Houston refinery for 1997.
(4) For 1997, includes all of CITGO refinery production, 50% of UNO-VEN
refinery production through April 30, 1997 and all of PDVMR refinery
production beginning May 1, 1997 through December 31, 1997.
</FN>
</TABLE>
Competitive Nature of the Petroleum Refining Business
The petroleum refining industry is cyclical and highly volatile,
reflecting capital intensity with high fixed and low variable costs. Petroleum
industry operations and profitability are influenced by a large number of
factors, over some of which individual petroleum refining and marketing
companies have little control. Governmental regulations and policies,
particularly in the areas of taxation, energy and the environment, have a
significant impact on petroleum activities, regulating how companies conduct
their operations and formulate their products. The U.S. petroleum refining
industry has entered a period of consolidation in which a number of former
competitors have combined their operations. Demand for crude oil and its
products is largely driven by the health of local and worldwide economies,
although weather patterns and taxation relative to other energy sources also
play significant parts. Generally, U.S. refiners compete for sales on the basis
of price and brand image and, in some areas, product quality.
3
<PAGE>
CITGO
CITGO refines, markets and transports gasoline, diesel fuel, jet fuel,
petrochemicals, lubricants, refined waxes, asphalt and other refined products
throughout the United States, primarily east of the Rocky Mountains. CITGO's
transportation fuel customers include primarily CITGO branded wholesale
marketers, convenience stores and airlines located mainly east of the Rocky
Mountains. Asphalt is principally marketed to independent paving contractors on
the East Coast of the United States. Lubricants are sold, principally in the
United States, to independent marketers, mass marketers and industrial
customers. Petrochemical, feedstocks and industrial products are sold to various
manufacturers and industrial companies throughout the United States. Petroleum
coke is sold primarily in international markets.
Refining
CITGO's aggregate net interest in rated crude oil refining capacity is
691 thousand barrels per day ("MBPD"). The following table shows the capacity of
each U.S. refinery in which CITGO holds an interest and CITGO's share of such
capacity as of December 31, 1999.
<TABLE>
<CAPTION>
Total Rated Net CITGO
Crude Ownership In
CITGO Refining Refining
Location Owner Interest Capacity Capacity
-------------------------- -------------- -------------- --------------
(%) (MBPD) (MBPD)
<S> <C> <C> <C> <C>
Lake Charles, LA CITGO 100 320 320
Corpus Christi, TX CITGO 100 150 150
Paulsboro, NJ CITGO 100 84 84
Savannah, GA CITGO 100 28 28
Houston, TX (1) LYONDELL-CITGO 41 265 109
-------------- --------------
Total Rated Refining
Capacity as of December 31,
1999 847 691
============== ==============
- --------------------
<FN>
(1) Initial interest acquired on July 1, 1993. CITGO has a one-time option,
exercisable after January 1, 2000 but not later than September 30, 2000, to
increase for an additional investment, its participation interest up to a
maximum of 50%. See "CITGO--Refining--LYONDELL-CITGO". See also "Factors
Affecting Forward Looking Statements".
</FN>
</TABLE>
4
<PAGE>
The following table shows CITGO's aggregate interest in refining capacity,
refinery input and product yield for the three years in the period ended
December 31, 1999.
CITGO Refinery Production (1)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------
1999(2) 1998(2) 1997(3)
----------------------- ----------------------------------------------
(MBPD, except as otherwise indicated)
<S> <C> <C> <C> <C> <C> <C>
Rated Refining Capacity at year end 691 691 693
Refinery Input
Crude oil 607 82% 615 81% 548 79%
Other feedstocks 129 18% 144 19% 143 21%
----------- ----------- ----------- ----------- ---------- -----------
Total 736 100% 759 100% 691 100%
=========== =========== =========== =========== ========== ===========
Product Yield
Light fuels
Gasoline 317 43% 334 43% 309 44%
Jet fuel 70 9% 66 9% 66 9%
Diesel/#2 fuel 136 18% 134 17% 112 16%
Asphalt 42 6% 45 6% 42 6%
Petrochemicals and industrial products 179 24% 193 25% 174 25%
----------- ----------- ----------- ----------- ---------- -----------
Total 744 100% 772 100% 703 100%
=========== =========== =========== =========== ========== ===========
Utilization of Rated Refining Capacity 88% 89% 79%
- --------------------
<FN>
(1) Includes all of CITGO refinery production, except as otherwise noted.
(2) Includes a weighted average of 41.25% of the Houston refinery for 1999 and 1998.
(3) Includes a weighted average of 34.44% of the Houston refinery for 1997.
</FN>
</TABLE>
CITGO produces its light fuels and petrochemicals primarily through its
Lake Charles and Corpus Christi refineries. Asphalt refining operations are
carried out through CITGO's Paulsboro and Savannah refineries. CITGO also owns
an interest in and obtains refined products from a refinery in Houston.
Lake Charles, Louisiana Refinery. This refinery has a rated refining
capacity of 320 MBPD and is capable of processing large volumes of heavy crude
oil into a flexible slate of refined products, including significant quantities
of high-octane unleaded gasoline and reformulated gasoline. The Lake Charles
refinery has a Solomon Process Complexity Rating of 17.6 (as compared to an
average of 13.6 for U.S. refineries in the most recently available Solomon
Associates, Inc. survey). The Solomon Process Complexity Rating is an industry
measure of a refinery's ability to produce higher value products. A higher
Solomon Process Complexity Rating indicates a greater capability to produce such
products.
5
<PAGE>
The following table shows the rated refining capacity, refinery input
and product yield at the Lake Charles refinery for the three years in the period
ended December 31, 1999.
Lake Charles Refinery Production
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------
1999 1998 1997
----------------------- ----------------------------------------------
(MBPD, except as otherwise indicated)
<S> <C> <C> <C> <C> <C> <C>
Rated Refining Capacity at year end 320 320 320
Refinery Input
Crude oil 298 89% 288 84% 291 88%
Other feedstocks 36 11% 54 16% 40 12%
----------- ----------- ----------- ---------- ----------- -----------
Total 334 100% 342 100% 331 100%
=========== =========== =========== ========== =========== ===========
Product Yield
Light fuels
Gasoline 171 50% 187 54% 177 52%
Jet fuel 63 18% 59 17% 60 18%
Diesel/#2 fuel 53 16% 47 13% 45 13%
Petrochemicals and industrial products 54 16% 55 16% 56 17%
----------- ----------- ----------- ---------- ----------- -----------
Total 341 100% 348 100% 338 100%
=========== =========== =========== ========== =========== ===========
Utilization of Rated Refining Capacity 93% 90% 91%
</TABLE>
Approximately 33%, 66% and 63% of the total crude runs at the Lake
Charles refinery, in the years 1999, 1998 and 1997, respectively, consisted of
crude oil with an average API gravity of 24 degrees or less. Due to the complex
processing required to refine such crude oil, the Lake Charles refinery's
economic crude oil throughput capacity is approximately 290 MBPD, which is
approximately 91% of its rated capacity of 320 MBPD. The volume of heavy crude
oil available to CITGO in 1999 was less than in previous years. As a result, the
crude oil slate refined in 1999 was lighter. (See "Items 1. and 2. Business and
Properties--Crude Oil and Refined Product Purchases").
The Lake Charles refinery's Gulf Coast location provides it with access
to crude oil deliveries from multiple sources; imported crude oil and feedstock
supplies are delivered by ship directly to the Lake Charles refinery, while
domestic crude oil supplies are delivered by pipeline and barge. In addition,
the refinery is connected by pipelines to the Louisiana Offshore Oil Port and to
terminal facilities in the Houston area through which it can receive crude oil
deliveries if the Lake Charles docks are temporarily inaccessible. For delivery
of refined products, the refinery is connected through the Lake Charles Pipeline
directly to the Colonial and Explorer Pipelines, which are the major refined
product pipelines supplying the northeast and midwest regions of the United
States, respectively. The refinery also uses adjacent terminals and docks, which
provide access for ocean tankers and barges to load refined products for
shipment.
The Lake Charles refinery's main petrochemical products are propylene
and benzene. Industrial products include sulphur, residual fuels and petroleum
coke.
Located adjacent to the Lake Charles refinery is a lubricants refinery
operated by CITGO and owned by Cit-Con Oil Corporation ("Cit-Con"), which is
owned 65% by CITGO and 35% by Conoco, Inc. ("Conoco"). Primarily because of its
specific design, the Cit-Con refinery produces high quality oils and waxes, and
is one of the few in the industry designed as a stand-alone lubricants refinery.
Feedstocks
6
<PAGE>
are supplied 65% from CITGO's Lake Charles refinery and 35% from Conoco's Lake
Charles refinery. Finished refined products are shared on the same pro rata
basis by CITGO and Conoco.
Corpus Christi, Texas Refinery. The Corpus Christi refinery is an
efficient and highly complex facility, capable of processing high volumes of
heavy crude oil into a flexible slate of refined products, with a Solomon
Process Complexity Rating of 16.7 (as compared to an average 13.6 for U.S.
refineries in the most recently available Solomon Associates, Inc. survey). This
refinery complex consists of the East and West Plants, located within five miles
of each other.
The following table shows rated refining capacity, refinery input and
product yield at the Corpus Christi refinery for the three years in the period
ended December 31, 1999.
Corpus Christi Refinery Production
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------
1999 1998 1997
----------------------- ---------------------- -----------------------
(MBPD, except as otherwise indicated)
<S> <C> <C> <C> <C> <C> <C>
Rated Refining Capacity at year end 150 150 150
Refinery Input
Crude oil 148 70% 152 71% 115 59%
Other feedstocks 62 30% 61 29% 79 41%
----------- ----------- ----------- ---------- ----------- -----------
Total 210 100% 213 100% 194 100%
=========== =========== =========== ========== =========== ===========
Product Yield
Light fuels
Gasoline 96 46% 97 46% 93 48%
Diesel/#2 fuel 55 27% 58 27% 45 23%
Petrochemicals and industrial products 56 27% 57 27% 56 29%
----------- ----------- ----------- ---------- ----------- -----------
Total 207 100% 212 100% 194 100%
=========== =========== =========== ========== =========== ===========
Utilization of Rated Refining Capacity 99% 101% 77%
</TABLE>
Corpus Christi crude runs during 1999 and 1998 consisted of 81% and
100%, respectively, heavy sour Venezuelan crude. The average API gravity of the
composite crude slate run at the Corpus Christi refinery is approximately 24
degrees. Crude oil supplies are delivered directly to the Corpus Christi
refinery through the Port of Corpus Christi. The relatively low utilization of
rated refining capacity in 1997 is a result of a major turnaround in that year.
CITGO operates the West Plant under a sublease agreement (the
"Sublease") from Union Pacific Corporation ("Union Pacific"). The basic term of
the Sublease ends on January 1, 2004, but CITGO may renew the Sublease for
successive renewal terms through January 31, 2011. CITGO has the right to
purchase the West Plant from Union Pacific at the end of the basic term, the end
of any renewal term, or on January 31, 2011 at a nominal price.
The Corpus Christi refinery's main petrochemical products include
cumene, cyclohexane, methyl tertiary butyl ether ("MTBE") and aromatics
(including benzene, toluene and xylene). The Company produces a significant
quantity of cumene, an important petrochemical product used in the engineered
plastics industry.
LYONDELL-CITGO Refining LP. Subsidiaries of CITGO and Lyondell Chemical
Company ("Lyondell") are partners in LYONDELL-CITGO Refining LP
("LYONDELL-CITGO"), which owns
7
<PAGE>
and operates a sophisticated 265 MBPD refinery previously owned by Lyondell and
located on the ship channel in Houston, Texas. At December 31, 1999, CITGO's
investment in LYONDELL-CITGO was $560 million. In addition, at December 31,
1999, CITGO held notes receivable from LYONDELL-CITGO of $28 million. (See
Consolidated Financial Statements of PDV America -- Note 3 in Item 14a). A
substantial amount of the crude oil processed by this refinery is supplied by
PDVSA under a long-term crude oil supply agreement through the year 2017. CITGO
purchases substantially all of the gasoline, diesel and jet fuel produced at
this refinery under a long-term contract. (See Consolidated Financial Statements
of PDV America -- Notes 2 and 3 in Item 14a).
Crude Oil and Refined Product Purchases
CITGO owns no crude oil reserves or production facilities and must
therefore rely on purchases of crude oil and feedstocks for its refinery
operations. In addition, because CITGO's refinery operations do not produce
sufficient refined products to meet the demands of its branded marketers, CITGO
purchases refined products, primarily gasoline, from other refiners, including
LYONDELL-CITGO, PDV Midwest Refining, L.L.C. ("PDVMR"), Chalmette Refining,
L.L.C. ("Chalmette") and Hovensa, L.L.C. ("HOVENSA"). (See "Item 13 -- Certain
Relationships and Related Transactions").
8
<PAGE>
Crude Oil Purchases. The following chart shows CITGO's purchases of
crude oil for the three years in the period ended December 31, 1999:
CITGO Crude Oil Purchases
<TABLE>
<CAPTION>
Lake Charles, LA Corpus Christi, TX Paulsboro, NJ Savannah, GA
------------------------ ------------------------ ------------------------ ------------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997 1999 1998 1997
------- -------- ------- ------- ------- -------- -------- ------- ------- ------- ----------------
(MBPD) (MBPD) (MBPD) (MBPD)
Suppliers
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PDVSA 104 134 130 118 153 117 42 52 49 19 17 14
PEMEX 54 51 61 14 - - - - - - - -
Occidental - 20 40 - - - - - - - - -
Other sources 142 88 57 15 - - - - - - - -
------- -------- ------- ------- ------- -------- -------- ------- ------- ------- ----------------
Total 300 293 288 147 153 117 42 52 49 19 17 14
======= ======== ======= ======= ======= ======== ======== ======= ======= ======= ======== =======
</TABLE>
CITGO's largest supplier of crude oil is PDVSA. CITGO has entered into
long-term crude oil supply agreements with PDVSA with respect to the crude oil
requirements for each of CITGO's refineries. The following table shows the base
and incremental volumes of crude oil contracted for delivery and the volumes of
crude oil actually delivered under these contracts in the three years ended
December 31, 1999.
CITGO Crude Oil Supply Contracts with PDVSA
<TABLE>
<CAPTION>
Volumes of
Crude Oil Purchased
Contract Crude For the Year Ended Contract
Oil Volume December 31, Expiration
--------------------------- ----------------------------
Base Incremental (1) 1999 1998 1997 Date
--------- ----------------- --------- --------- -------- -------------
(MBPD) (MBPD) (year)
Location
<S> <C> <C> <C> <C> <C> <C>
Lake Charles, LA (2) 120 50 101(3) 121 115 2006
Corpus Christi, TX (2) 130 - 108(3) 128 125 2012
Paulsboro, NJ (2) 30 - 22(3) 35 35 2010
Savannah, GA (2) 12 - 11(3) 12 12 2013
Houston, TX (4) 200 - 173 223 216 2017
--------------------
<FN>
(1) The supply agreement for the Lake Charles refinery gives PDVSA the
right to sell to CITGO incremental volumes up to the maximum
amount specified in the table, subject to certain restrictions
relating to the type of crude oil to be supplied, refining
capacity and other operational considerations at the refinery.
(2) Volumes purchased as shown on this table do not equal purchases
from PDVSA (shown in the previous table) as a result of transfers
between refineries of contract crude purchases included here and
spot purchases which are included in the previous table.
(3) The crude supply contracts include force majeure clauses that have
been exercised. Exercise of these clauses requires that the
Company locate alternative sources of supply for its crude oil
requirements, which has resulted in higher crude oil costs.
(4) CITGO acquired a participation interest in LYONDELL-CITGO, the
owner of the Houston refinery, on July 1, 1993. In connection with
such transaction, LYONDELL-CITGO entered into a long-term crude
oil supply agreement with PDVSA that provided for delivery volumes
of 135 MBPD until the completion of a refinery enhancement project
at which time the delivery volumes increased to a range that
extends from 200 MBPD to 230 MBPD.
</FN>
</TABLE>
9
<PAGE>
These crude oil supply agreements require PDVSA to supply minimum
quantities of crude oil and other feedstocks to CITGO for a fixed period,
usually 20 to 25 years. The supply agreements differ somewhat for each entity
and each CITGO refinery but generally incorporate formula prices based on the
market value of a slate of refined products deemed to be produced for each
particular grade of crude oil or feedstock, less (i) certain deemed refining
costs; (ii) certain actual costs, including transportation charges, import
duties and taxes; and (iii) a deemed margin, which varies according to the grade
of crude oil or feedstock delivered. Under each supply agreement, deemed margins
and deemed costs are adjusted periodically by a formula primarily based on the
rate of inflation. Because deemed operating costs and the slate of refined
products deemed to be produced for a given barrel of crude oil or other
feedstock do not necessarily reflect the actual costs and yields in any period,
the actual refining margin earned by a purchaser under the various supply
agreements will vary depending on, among other things the efficiency with which
such purchaser conducts its operations during such period.
These crude supply agreements contain force majeure provisions which
entitle the supplier to reduce the quantity of crude oil and feedstocks
delivered under the crude supply agreements under specified circumstances. As of
December 31, 1999, PDVSA deliveries of crude oil to CITGO were less than
contractual base volumes due to PDVSA's declaration of force majeure pursuant to
all of the long-term crude oil supply contracts related to CITGO's refineries.
Therefore, the Company has been required to use alternative sources of crude
oil. As a result, CITGO estimates that crude oil costs for the year ended
December 31, 1999 were higher by $55 million from what would have otherwise been
the case. It is not possible to forecast the future financial impacts of these
reductions in crude oil deliveries on CITGO's costs because the correlation
between crude oil and refined product prices is not constant over time.
Additionally, because of among other things, changes in crude oil economics, the
duration of force majeure cannot be forecasted.
These contracts also contain provisions which entitle the supplier to
reduce the quantity of crude oil and feedstocks delivered under the crude supply
agreements and oblige the supplier to pay CITGO the deemed margin under that
contract for each barrel of reduced crude oil and feedstocks. During the second
half of 1999, PDVSA did not deliver naphtha pursuant to one of the contracts and
made contractually specified deemed margin payments in lieu thereof. The
financial effect was an increase in costs by $4 million from what would have
otherwise been the case.
Prior to 1995, certain costs were used in the CITGO supply agreement
formulas, aggregating approximately $70 million per year, which were to cease
being deductible after 1996. Commencing in the third quarter of 1995, a portion
of such deductions was deferred from 1995 and 1996 to the years 1997 through
1999. The effect of the adjustments to the original modifications was to reduce
the cost of crude oil purchased from PDVSA by approximately $21 million in 1999,
$25 million in 1998 and $25 million in 1997, as compared to the original
modification and without giving effect to any other factors that may affect the
amount payable for crude oil under these agreements.
Most of the crude oil and feedstocks purchased by CITGO from PDVSA are
delivered on tankers owned by PDV Marina, S.A., a wholly-owned subsidiary of
PDVSA. In 1999, 91% of the PDVSA contract crude oil delivered to the Lake
Charles and Corpus Christi refineries was delivered on tankers operated by this
PDVSA subsidiary.
CITGO purchases additional crude oil under a 90-day evergreen agreement
with an affiliate of Petroleos Mexicanos ("PEMEX"). CITGO's refineries are
particularly well suited to refine PEMEX's Maya heavy, sour crude oil, which is
similar in many respects to several types of Venezuelan crude oil.
CITGO was a party to a contract with an affiliate of Occidental
Petroleum Corporation ("Occidental") for the purchase of light, sweet crude oil
to produce lubricants. This contract expired on
10
<PAGE>
August 31, 1998. CITGO also purchases sweet crude oil under long-standing
relationships with numerous other producers.
Refined Product Purchases. CITGO is required to purchase refined
products to supplement the production of the Lake Charles and Corpus Christi
refineries in order to meet demand of CITGO's marketing network. During 1999,
CITGO's shortage in gasoline production approximated 344 MBPD. However, due to
logistical needs, timing differences and product grade imbalances, CITGO
purchased approximately 691 MBPD of gasoline and sold into the spot market, or
to refined product traders or other refineries approximately 245 MBPD of
gasoline. The following table shows CITGO's purchases of refined products for
the three years in the period ended December 31, 1999.
CITGO Refined Product Purchases
Year Ended December 31,
-------------------------------------------------
1999 1998 1997
-------------- ------------- -------------
(MBPD)
Light Fuels
Gasoline 691 581 518
Jet fuel 77 69 74
Diesel/#2 fuel 279 208 190
-------------- ------------- -------------
Total 1,047 858 782
============== ============= =============
As of December 31, 1999, CITGO purchased substantially all of the
gasoline, diesel and jet fuel produced at the LYONDELL-CITGO refinery under a
long-term contract which extends through the year 2017. LYONDELL-CITGO was a
major supplier in 1999 providing CITGO with 117 MBPD of gasoline, 68 MBPD of
diesel/#2 fuel and 18 MBPD of jet fuel. See "--Refining--LYONDELL-CITGO".
As of May 1, 1997, CITGO began purchasing, under a contract with a
sixty-month term, substantially all of the refined products produced at the
PDVMR refinery. During 1999, the PDVMR refinery, located in Lemont, Illinois,
provided CITGO with 84 MBPD of gasoline, 38 MBPD of diesel/#2 fuel and 2 MBPD of
jet fuel.
An affiliate of PDVSA acquired a 50% equity interest in a refinery in
Chalmette, Louisiana in October 1997 and has assigned to CITGO its option to
purchase up to 50% of the refined products produced at the refinery through
December 31, 2000. CITGO acquired approximately 66 MBPD of refined products from
the refinery during 1999, approximately one-half of which was gasoline.
In October 1998 an affiliate of PDVSA acquired a 50% equity interest in
HOVENSA (a joint venture that owns and operates a refinery in St. Croix, U.S.
Virgin Islands) and has the right under a product sales agreement to assign
periodically to CITGO, or other related parties, its option to purchase 50% of
the refined products produced by HOVENSA (less a certain portion of such
products that HOVENSA will market directly in the local and Caribbean markets).
In addition, under the product sales agreement, the PDVSA affiliate has
appointed CITGO as its agent in designating which of its affiliates shall from
time to time take deliveries of the refined products available to it. The
product sales agreement will be in effect for the life of the joint venture,
subject to termination events based on default or mutual agreement. Pursuant to
the above arrangement, CITGO acquired approximately 118 MBPD of refined products
from the refinery during 1999, approximately one-half of which was gasoline.
11
<PAGE>
Marketing
CITGO's major products are light fuels (including gasoline, jet fuel,
and diesel fuel), industrial products and petrochemicals, asphalt, lubricants
and waxes. The following table shows revenue and volumes of each of these
product categories for the three years in the period ended December 31, 1999.
CITGO Refined Product Sales Revenues and Volumes
<TABLE>
<CAPTION>
Year Ended December 31, Year Ended December 31,
----------------------------------------------------------------------
1999 1998 1997 1999 1998 1997
----------- ----------- ----------- ---------- ----------- -----------
($ in millions) (MM gallons)
Light fuels
<S> <C> <C> <C> <C> <C> <C>
Gasoline $ 7,691 $ 6,252 $ 7,754 13,115 13,241 11,953
Jet fuel 1,129 828 1,183 2,198 1,919 2,000
Diesel / #2 fuel 2,501 1,945 2,439 5,057 4,795 4,288
Asphalt 338 300 398 753 774 749
Petrochemicals and industrial products 1,024 937 1,172 2,063 2,440 1,940
Lubricants and waxes 482 441 467 285 230 239
----------- ----------- ----------- ---------- ----------- -----------
Total $13,165 $10,703 $13,413 23,471 23,399 21,169
=========== =========== =========== ========== =========== ===========
</TABLE>
Light Fuels. Gasoline sales accounted for 58% of CITGO's refined
product sales in the years 1999, 1998 and 1997. CITGO markets CITGO branded
gasoline through approximately 13,500 independently owned and operated CITGO
branded retail outlets (including 11,471 branded retail outlets owned and
operated by approximately 816 independent marketers and 2,027 7-Eleven(TM)
convenience stores) located throughout the United States, primarily east of the
Rocky Mountains. CITGO purchases gasoline to supply its marketing network, as
the gasoline production from the Lake Charles and Corpus Christi refineries was
only equivalent to approximately 45%, 48% and 47% of the volume of CITGO branded
gasoline sold in 1999, 1998 and 1997, respectively. See "--Crude Oil and Refined
Product Purchases -- Refined Product Purchases".
CITGO's strategy is to enhance the value of the CITGO brand to obtain
premium pricing for its products by appealing to consumer preference for quality
petroleum products and services. This is accomplished through a commitment to
quality, dependability and customer service to its independent marketers, which
constitute CITGO's primary distribution channel.
Sales to independent branded marketers typically are made under
contracts that range from three to seven years. Sales to 7-Eleven(TM)
convenience stores are made under a contract that extends through the year 2006.
Under this contract, CITGO arranges all transportation and delivery of motor
fuels and handles all product ordering. CITGO also acts as processing agent for
the purpose of facilitating and implementing orders and purchases from
third-party suppliers. CITGO receives a processing fee for such services.
CITGO markets jet fuel directly to airline customers at 27 airports,
including such major hub cities as Atlanta, Chicago, Dallas/Fort Worth, New York
and Miami.
CITGO's delivery of light fuels to its customers is accomplished in
part through 50 refined product terminals located throughout CITGO's primary
market territory. Of these terminals, 38 are wholly-owned by CITGO and 12 are
jointly owned. Fourteen of CITGO's product terminals have waterborne docking
facilities, which greatly enhance the flexibility of CITGO's logistical system.
In addition, CITGO operates and delivers refined products from seven terminals
owned by PDVMR
12
<PAGE>
in the Midwest. Refined product terminals owned or operated by CITGO provide a
total storage capacity of approximately 22 million barrels. Also, CITGO has
active exchange relationships with over 300 other refined product terminals,
providing flexibility and timely response capability to meet distribution needs.
Petrochemicals and Industrial Products. CITGO sells petrochemicals in
bulk to a variety of U.S. manufacturers as raw material for finished goods. The
majority of CITGO's cumene production is sold to Mount Vernon Phenol Plant
Partnership ("MVPPP"), a joint venture phenol production plant in which CITGO is
a limited partner. The phenol plant produces phenol and acetone for sale
primarily to the principal partner in the phenol plant for the production of
plastics. Sulphur is sold to the U.S. and international fertilizer industries;
cycle oils are sold for feedstock processing and blending; natural gas liquids
are sold to the U.S. fuel and petrochemical industry; petroleum coke is sold
primarily in international markets, through a joint venture, for use as kiln and
boiler fuel; and residual fuel blendstocks are sold to a variety of fuel oil
blenders.
Asphalt. CITGO markets asphalt through 15 terminals located along the
East Coast, from Savannah, Georgia to Albany, New York. Asphalt is sold
primarily to independent contractors for use in the construction and resurfacing
of roadways. Demand for asphalt in the Northeastern U.S. peaks in the summer
months.
Lubricants and Waxes. CITGO markets many different types, grades and
container sizes of lubricants and wax products, with the bulk of sales
consisting of automotive oil and lubricants and industrial lubricants. Other
major lubricant products include 2-cycle engine oil and automatic transmission
fluid.
Pipeline Operations
CITGO owns and operates 142 miles of crude oil pipeline systems and
approximately 1,021 miles of products pipeline systems. CITGO also has equity
interests in two crude oil pipeline companies with a total of approximately
1,929 miles of pipeline plus equity interests in five refined product pipeline
companies with a total of approximately 8,437 miles of pipeline. CITGO's
pipeline interests provide it with access to substantial refinery feedstocks and
reliable transportation to refined product markets, as well as cash flows from
dividends. One of the refined product pipelines in which CITGO has an interest,
Colonial Pipeline, is the largest refined product pipeline in the United States,
transporting refined products from the Gulf Coast to the mid-Atlantic and
eastern seaboard states.
Employees
CITGO and its subsidiaries have a total of approximately 4,200
employees, approximately 1,700 of who are covered by 15 union contracts.
Approximately 1,600 of the union employees are employed in refining operations.
The remaining union employees are located primarily at a lubricant plant and
various refined product terminals.
PDV Midwest Refining, L.L.C.
Refining
PDVMR produces light fuels, petrochemicals and industrial products at
its refinery in Lemont, Illinois. The refinery has a crude distillation capacity
of 167 MBPD and has a Solomon Process Complexity Rating of 11.6 (as compared to
an average of 13.6 for U.S. refineries in the most recently available Solomon
Associates, Inc., survey).
13
<PAGE>
The following table shows refining capacity, refinery input and product
yield at the Lemont refinery for the three years in the period ended December
31, 1999.
Lemont Refinery Production
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------
1999 1998 1997
------------------------ ------------------------ ------------------------
(MBPD, except as otherwise indicated)
<S> <C> <C> <C> <C> <C> <C>
Rated Refining Capacity at year end 167 167 160
Refinery Input
Crude oil 146 90% 148 91% 151 89%
Other feedstocks 17 10% 15 9% 17 11%
------------ ----------- ------------ ----------- ----------- ------------
Total 163 100% 163 100% 168 100%
============ =========== ============ =========== =========== ============
Product Yield
Light fuels 84 51% 79 49% 87 52%
Gasoline 2 1% 3 2% 3 2%
Jet fuel 37 23% 41 25% 39 24%
Diesel/#2 fuel 40 25% 38 24% 37 22%
------------ ----------- ------------ ----------- ----------- ------------
Industrial Products & Petrochemicals 163 100% 161 100% 166 100%
============ =========== ============ =========== =========== ============
Total
Utilization of Rated Refining Capacity 87% 89% 94%
</TABLE>
The average API gravity of the composite crude slate run at the Lemont
refinery is approximately 27 degrees. Crude oil is supplied to the refinery by
pipeline.
Petrochemical products at the Lemont refinery include benzene, toluene
and xylene, plus a range of ten different aliphatic solvents.
PDVMR owns a 25% interest in a partnership which operates a needle
coker production facility adjacent to the Lemont refinery (the "Needle Coker").
The remaining 75% interest is held by various subsidiaries of Union Oil Company
of California.
Crude Oil Purchases
PDVMR owns no crude oil reserves or production facilities and,
therefore, relies on purchases of crude oil for its refining operations. A
portion of the crude oil refined at the Lemont refinery is supplied by PDVSA
under a crude oil supply agreement, effective as of April 23, 1997, that expires
in the year 2002 and thereafter is renewable annually. The contract calls for
delivery of a guaranteed volume of up to 100 MBPD; however, PDVMR is not
required to purchase a set minimum. In 1999, the crude oil processed at the
Lemont refinery was 21 percent Venezuelan, 62 percent Canadian and 17 percent
from other sources.
Marketing
Subsequent to the transfer of assets on May 1, 1997, substantially all
of PDVMR's products are sold to and marketed by CITGO. (See "Item 13. Certain
Relationships and Related Transactions".)
14
<PAGE>
Employees
PDVMR has no employees. CITGO operates the Lemont refinery and provides
all administrative functions to the Company pursuant to a Refinery Operating
Agreement (as defined below).
Refinery Operating Agreement with CITGO
CITGO operates the Lemont refinery in accordance with a Refinery
Operating Agreement (the "Refinery Operating Agreement") between CITGO and
PDVMR. The Refinery Operating Agreement sets out the duties, obligations and
responsibilities of the operator and the Company with respect to the operation
of the refinery. CITGO provides all administrative functions to the Company,
including cash management, legal and accounting services. The term of the
agreement is 60 months, commencing May 1, 1997, and shall be automatically
renewed for periods of 12 months (subject to early termination as provided in
the Refinery Operating Agreement). (See "Item 13--Certain Relationships and
Related Transactions".)
Environment and Safety
Environment - General
Beginning in 1994, the U.S. refining industry was required to comply
with stringent product specifications under the 1990 Clean Air Act ("CAA")
Amendments for reformulated gasoline and low sulphur diesel fuel which
necessitated additional capital and operating expenditures, and altered
significantly the U.S. refining industry and the return realized on refinery
investments. In addition, numerous other factors affect the Companies' plans
with respect to environmental compliance and related expenditures. See "Factors
Affecting Forward Looking Statements".
In addition, the Companies are subject to various federal, state and
local environmental laws and regulations which may require the Companies to take
action to correct or improve the effects on the environment of prior disposal or
release of petroleum substances by the Companies or other parties. Management
believes the Companies are in compliance with these laws and regulations in all
material aspects. Maintaining compliance with environmental laws and regulations
in the future could require significant capital expenditures and additional
operating costs.
Based on currently available information, including the continuing
participation of former owners in remediation actions and indemnification
agreements with third parties, the Companies' management believes that its
current accruals are sufficient to address the Companies' environmental clean-up
obligations. Conditions which require additional expenditures may exist for
various of the Companies' sites including, but not limited to, the Companies'
operating refinery complexes, closed refineries, service stations and crude oil
and petroleum product storage terminals. The amount of such future expenditures,
if any, is indeterminable.
Environment -- CITGO
In 1992, CITGO reached an agreement with a state agency to cease usage
of certain surface impoundments at CITGO's Lake Charles refinery by 1994. A
mutually acceptable closure plan was filed with the state in 1993. CITGO and its
former owner are participating in the closure and sharing the related costs
based on estimated contributions of waste and ownership periods. The remediation
commenced in December 1993. In 1997, CITGO presented a proposal to a state
agency revising the 1993 closure plan. In 1998 and 2000, CITGO submitted further
revisions as requested by the state agency. A ruling on the proposal, as
amended, is expected in 2000 with final closure to begin in 2002.
15
<PAGE>
In 1992, an agreement was reached between CITGO and its former owner
concerning a number of environmental issues. The agreement consisted, in part,
of payments to CITGO totaling $46 million. The former owner will continue to
share the costs of certain specific environmental remediation and certain tort
liability actions based on ownership periods and specific terms of the
agreement.
The Texas Natural Resources Conservation Commission ("TNRCC") conducted
an environmental compliance review at the Corpus Christi refinery in the first
and second quarters of 1998. In January 1999, the TNRCC issued to CITGO a Notice
of Violation ("NOV") arising from this review and in October 1999 proposed fines
of approximately $1.6 million related to the NOV. Most of the alleged violations
refer to recordkeeping and reporting issues, failure to meet required emission
levels, and failure to properly monitor emissions. TNRCC issued to CITGO another
NOV in December 1999 based on its 1999 audit which cites items similar to those
cited earlier and the agency has tentatively suggested that the two audits
should be combined for resolution. CITGO intends to vigorously protest the
alleged violations and proposed fines.
In June 1999, CITGO and numerous other industrial companies received
notice from the U.S. Environmental Protection Agency, ("EPA") that the EPA
believes these companies have contributed to contamination in the Calcasieu
Estuary, in the proximity of Lake Charles, Calcasieu Parish, Louisiana and are
Potentially Responsible Parties ("PRPs") under the Comprehensive Environmental
Response, Compensation, and Liability Act ("CERCLA"). The EPA made a demand for
payment of its past investigation costs from CITGO and other PRPs and advised it
intends to conduct a Remedial Investigation/Feasibility Study ("RI/FS") under
its CERCLA authority. CITGO and other PRPs may be potentially responsible for
the costs of the RI/FS. CITGO disagrees with the EPA's allegations and intends
to contest this matter.
In October 1999, the EPA issued a NOV to CITGO for violations of
federal regulations regarding reformulated gasoline found during a May 1998
inspection at CITGO's Braintree, Massachusetts terminal and recommended a
penalty of $218,500. CITGO intends to vigorously contest the alleged violations
and proposed fines.
Based on currently available information, including the continuing
participation of former owners in remediation actions and indemnification
agreements with third parties, CITGO management believes that its accruals are
sufficient to address its environmental obligations. Conditions which require
additional expenditures may exist with respect to various Company sites
including, but not limited to, CITGO's operating refinery complexes, closed
refineries, service station sites and crude oil and petroleum product storage
terminals. The amount of such future expenditures, if any, is indeterminable.
Increasingly stringent regulatory provisions periodically require
additional capital expenditures. During 1999, CITGO spent approximately $81
million for environmental and regulatory capital improvements in its operations.
Management currently estimates that CITGO will spend approximately $350 million
for environmental and regulatory capital projects over the five-year period
2000-2004. These estimates may vary due to a variety of factors. See "Item 7 --
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources". See also "Factors Affecting
Forward Looking Statements".
Environment -- PDVMR
In accordance with the Partnership Interest Retirement Agreement, the
Company, VPHI Midwest, Inc., a subsidiary of the Company, and PDVMR assumed
joint and several liability for all environmental matters relating to past
operations of UNO-VEN.
16
<PAGE>
In November 1999, the Attorney General's Officer of Illinois filed a
complaint in the 12th Judicial Circuit Court, Will County, Illinois against PDV
Midwest Refining and CITGO Petroleum Corporation alleging damages from several
releases to the air of contaminants from the Lemont, Illinois refinery. The
initial complaint addressed alleged violations and potential compliance actions.
The Attorney General's office later made a demand for penalties of approximately
$150,000. While CITGO and PDVMR disagree with the Attorney General's alleged
violations and proposed penalty demand, they are cooperating with the agency and
anticipate reaching an agreement with the agency to resolve this lawsuit by late
2000.
Safety
Due to the nature of petroleum refining and distribution, CITGO and
PDVMR are subject to stringent occupational health and safety laws and
regulations. CITGO and PDVMR maintain comprehensive safety, training and
maintenance programs. PDV America believes that it is in substantial compliance
with occupational health and safety laws.
ITEM 3. Legal Proceedings
Various lawsuits and claims arising in the ordinary course of business
are pending against the Companies. The Companies record accruals for potential
losses when, in management's opinion, such losses are probable and reasonably
estimable. If known lawsuits and claims were to be determined in a manner
adverse to the Companies, and in amounts greater than the accruals of the
Companies, then such determinations could have a material adverse effect on the
results of operations of the Companies in a given reporting period. However, in
management's opinion, the ultimate resolution of these lawsuits and claims will
not exceed, by a material amount, the amount of the accruals and the insurance
coverage available to the Companies. This opinion is based upon management's and
counsel's current assessment of these lawsuits and claims. The most significant
lawsuits and claims are discussed below.
Litigation is pending in federal court in Lake Charles, Louisiana,
against CITGO by a number of current and former Lake Charles refinery employees
and applicants asserting claims of racial discrimination in connection with
CITGO's employment practices. The first trial in this case, which involved two
plaintiffs, began in October 1999 and resulted in verdicts for CITGO. The Court
granted CITGO's motion for summary judgment with respect to another group of
claims; an appeal of this ruling is expected. Trials of the remaining cases are
currently stayed.
The case brought in the United States District Court for the Northern
District of Illinois by the Oil Chemical & Atomic Workers, Local 7-517 against
UNO-VEN, CITGO, PDVSA, PDV America, and Union Oil Company of California pursuant
to Section 301 of the Labor Management Relations Act ("LMRA") resulted in the
court's ruling in favor of all defendants on Motions for Summary Judgment in
June, 1998; this ruling was affirmed on appeal and the case is now terminated.
In the case of Francois Oil Company, Inc. versus Stop-N'-Go of Madison,
Inc., et al. filed in federal district court in Wisconsin, Stop-N'-Go, a former
UNO-VEN marketer, sued UNO-VEN for $1 million, alleging that UNO-VEN had
fraudulently induced it to breach a supply contract with Francois Oil. UNO-VEN's
motion for summary judgment was granted in September, 1998; this ruling was
affirmed on appeal, terminating this case.
Four former UNO-VEN marketers have filed a class action complaint
against UNO-VEN alleging improper termination of the UNO-VEN Marketer Sales
Agreement under the Petroleum Marketing
17
<PAGE>
Practices Act in connection with PDVMR's 1997 acquisition of Unocal's interest
in UNO-VEN. The lawsuit is pending in U.S. District Court in Wisconsin and is in
the discovery phase.
PDVMR and the Company, jointly and severally, have agreed to indemnify
UNO-VEN and certain other related entities against certain liabilities and
claims, including the preceding two matters.
In May 1997, an explosion and fire occurred at CITGO's Corpus Christi
refinery. No serious personal injuries were reported. CITGO received
approximately 7,500 individual claims for personal injury and property damages
related to the above noted incident. Approximately 1,300 of these claims have
been resolved for amounts which individually and collectively were not material.
There are presently seventeen lawsuits filed on behalf of approximately 9,000
individuals arising out of this incident in federal and state courts in Corpus
Christi alleging property damages, personal injury and punitive damages. A trial
of one of the federal court lawsuits in October 1998 involving ten bellwether
plaintiffs, out of approximately 400 plaintiffs, resulted in a verdict for
CITGO. The remaining plaintiffs in this case have agreed to settle for an
immaterial amount.
A class action lawsuit is pending in Corpus Christi, Texas, state court
against CITGO and other operators and owners of nearby industrial facilities
which claims damages for reduced value of residential properties located in the
vicinity of the industrial facilities as a result of air, soil and groundwater
contamination. CITGO has contracted to purchase all of the 275 properties
included in the lawsuit which are in an area adjacent to CITGO's Corpus Christi
refinery and settle the property damage claims relating to these properties.
Related to this purchase, $15.7 million was expensed in 1997. The trial judge
recently ruled, over CITGO's objections, that a settlement agreement CITGO
entered into in September 1997 and subsequently withdrew from, which provided
for settlement of the remaining property damage claims for $5 million, is
enforceable, CITGO believes this ruling is erroneous and will appeal. The trial
against CITGO of these remaining claims will be postponed indefinitely. Two
related personal injury and wrongful death lawsuits were filed against the same
defendants in 1996, one of which is scheduled for trial in 2000. A trial date
for the other case has not been set.
CITGO is among defendants to lawsuits in California, North Carolina and
New York alleging contamination of water supplies by methyl tertiary butyl ether
("MTBE"), a component of gasoline. The action in California was filed in
November 1998 by the South Tahoe Public Utility District and CITGO was added as
a defendant in February 1999. The North Carolina case, filed in January 1999,
and the New York case, filed in January 2000, are putative class actions on
behalf of owners of water wells and other drinking water supplies in the states.
All of these actions allege that MTBE poses public heath risks. These matters
are in early stages of discovery. CITGO has denied all of the allegations and is
pursuing its defenses.
ITEM 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
18
<PAGE>
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's common stock is not publicly traded. All of the Company's
common stock is held by PDV Holding, Inc., a Delaware corporation whose ultimate
parent is PDVSA. In 1999, PDV America declared and paid dividends of $22 million
to PDV Holding, Inc.
ITEM 6. Selected Financial Data
The following table sets forth certain selected historical consolidated
financial and operating data of PDV America as of the end of and for each of the
five years in the period ended December 31, 1999. The following table should be
read in conjunction with the consolidated financial statements of PDV America as
of December 31, 1999 and 1998, and for each of the three years in the period
ended December 31, 1999, included in "Item 8. Financial Statements and
Supplementary Data".
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------
1999 1998 1997 1996 1995(1)
----------- ----------- ----------- ----------- -----------
($ in millions)
<S> <C> <C> <C> <C> <C>
Income Statement Data
Sales $13,332 $10,960 $13,622 $12,952 $10,522
Equity in earnings (losses) of affiliates 22 82 69 45 48
Net revenues 13,410 11,107 13,754 13,071 10,647
Income before extraordinary gain 142 231 228 138 143
Extraordinary gain(2) - - - - 3
Net income 142 231 228 138 146
Other comprehensive income (loss) (3) - - - -
Comprehensive income 139 231 228 138 146
Ratio of Earnings to Fixed Charges (3) 2.52x 3.06x 2.58x 1.91x 2.02x
Balance Sheet Data
Total assets $7,746 $7,075 $7,244 $6,938 $ 6,220
Long-term debt (excluding current portion)(4) 2,096 2,174 2,164 2,595 2,297
Total debt (5) 2,442 2,273 2,526 2,755 2,428
Shareholder's equity 2,718 2,601 2,589 2,111 1,973
- --------------------
<FN>
(1) Includes operations of Cato Oil & Grease Company since May 1, 1995.
(2) Represents extraordinary gain or (charges) for the early extinguishment of
debt (net of related income tax provision of $2 million) in 1995.
(3) For the purpose of calculating the ratio of earnings to fixed charges,
"earnings" consist of income before income taxes and cumulative effect of
accounting changes plus fixed charges (excluding capitalized interest),
amortization of previously capitalized interest and certain adjustments to
equity in income of affiliates. "Fixed charges" include interest expense,
capitalized interest, amortization of debt issuance costs and a portion of
operating lease rent expense deemed to be representative of interest.
(4) Includes long-term debt to third parties, note payable to affiliate and
capital lease obligations.
(5) Includes short-term bank loans, current portion of capital lease
obligations and long-term debt, long-term debt and capital lease
obligations.
</FN>
</TABLE>
19
<PAGE>
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The following discussion of the financial condition and results of
operations of PDV America should be read in conjunction with the consolidated
financial statements of PDV America included elsewhere herein.
Petroleum industry operations and profitability are influenced by a
large number of factors, some of which individual petroleum refining and
marketing companies cannot entirely control. Governmental regulations and
policies, particularly in the areas of taxation, energy and the environment,
have a significant impact on petroleum activities, regulating how companies
conduct their operations and formulate their products, and, in some cases,
limiting their profits directly. Demand for crude oil and refined products is
largely driven by the condition of local and worldwide economies, although
weather patterns and taxation relative to other energy sources also play a
significant part. PDV America's consolidated operating results are affected by
these industry-specific factors and by company-specific factors, such as the
success of marketing programs and refinery operations.
The earnings and cash flows of companies engaged in the refining and
marketing business in the United States are primarily dependent upon producing
and selling quantities of refined products at margins sufficient to cover fixed
and variable costs. The refining and marketing business is characterized by high
fixed costs resulting from the significant capital outlays associated with
refineries, terminals and related facilities. This business is also
characterized by substantial fluctuations in variable costs, particularly costs
of crude oil, feedstocks and blending components, and in the prices realized for
refined products. Crude oil and refined products are commodities whose price
levels are determined by market forces beyond the control of the Companies.
In general, prices for refined products are significantly influenced by
the price of crude oil, feedstocks and blending components. Although an increase
or decrease in the price for crude oil, feedstocks and blending components
generally results in a corresponding increase or decrease in prices for refined
products, generally there is a lag in the realization of the corresponding
increase or decrease in prices for refined products. The effect of changes in
crude oil prices on PDV America's consolidated operating results therefore
depends in part on how quickly refined product prices adjust to reflect these
changes. A substantial or prolonged increase in crude oil prices without a
corresponding increase in refined product prices, or a substantial or prolonged
decrease in refined product prices without a corresponding decrease in crude oil
prices, or a substantial or prolonged decrease in demand for refined products
could have a significant negative effect on the Companies' earnings and cash
flows. CITGO purchases a significant amount of its crude oil requirements from
PDVSA under long-term supply agreements (expiring in the years 2006 through
2013). This supply represented approximately 48% of the crude oil processed in
refineries operated by CITGO in the year ended December 31, 1999. The crude
supply contracts include force majeure clauses that have been exercised. The
exercise of these clauses requires that the Company use alternative sources of
supply for its crude oil requirements, and such action resulted in higher crude
oil costs. (See Items 1. And 2. Business and Properties -- Crude Oil and Refined
Product Purchases). CITGO also purchases significant volumes of refined products
to supplement the production from its refineries to meet marketing demands and
to resolve logistical issues. PDV America's earnings and cash flows are also
affected by the cyclical nature of petrochemical prices. As a result of the
factors described above, the earnings and cash flows of PDV America may
experience substantial fluctuations. Inflation was not a significant factor in
the operations of PDV America during the three years ended December 31, 1999.
20
<PAGE>
CITGO's revenues accounted for approximately 99% of PDV America's
consolidated revenues in 1999, 1998 and 1997. PDVMR's sales of $1,205 million
for the period ended December 31, 1999 were primarily to CITGO and, accordingly,
these were eliminated in consolidation.
The following table summarizes the sources of PDV America's sales
revenues and volumes.
PDV America Sales Revenue and Volumes
<TABLE>
<CAPTION>
Year Ended December 31, Year Ended December 31,
------------------------------------- -------------------------------------
1999 1998 1997 1999 1998 1997
----------- ----------- ----------- ----------- ---------- ----------
($ in millions) (MM gallons)
<S> <C> <C> <C> <C> <C> <C>
Gasoline $ 7,691 $ 6,252 $ 7,754 13,115 13,241 11,953
Jet fuel 1,129 828 1,183 2,198 1,919 2,000
Diesel / #2 fuel 2,501 1,945 2,439 5,057 4,795 4,288
Asphalt 338 300 398 753 774 749
Petrochemicals and industrial products 1,041 952 1,178 2,306 2,658 1,961
Lubricants and waxes 482 441 467 285 230 239
----------- ----------- ----------- ----------- ---------- ----------
Total refined product sales $13,182 $10,718 $13,419 23,714 23,617 21,190
Other sales 150 242 203 - - -
----------- ----------- ----------- ----------- ---------- ----------
Total sales $13,332 $10,960 $13,622 23,714 23,617 21,190
=========== =========== =========== =========== ========== ==========
</TABLE>
The following table summarizes PDV America's cost of sales and
operating expenses.
PDV America Cost of Sales and Operating Expenses
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
($ in millions)
<S> <C> <C> <C>
Crude oil $ 3,804 $ 2,571 $ 3,552
Refined products 6,640 5,102 6,739
Intermediate feedstocks 990 900 1,240
Refining and manufacturing costs 999 949 940
Other operating costs and expenses and inventory changes 374 784 527
------------ ------------ ------------
Total cost of sales and operating expenses $ 12,807 $ 10,306 $ 12,998
============ ============ ============
</TABLE>
Results of Operations -- 1999 Compared to 1998
Sales revenues and volumes. Sales increased $2,372 million,
representing a 22% increase from 1998 to 1999. This was due to an increase in
average sales price of 22% while sales volume remained flat. (See PDV America
Sales Revenues and Volumes table above.)
Equity in earnings of affiliates. Equity in earnings of affiliates
decreased by approximately $60 million, or 73% from $82 million in 1998 to $22
million in 1999. The decrease was primarily due to the change in the earnings of
LYONDELL-CITGO, CITGO's share of which decreased $58 million, from $59 million
in 1998 to $1 million in 1999. The decrease in LYONDELL-CITGO earnings was due
primarily to reduced processing of extra heavy crude oil as a result of lower
allocations and deliveries and a less favorable mix of extra heavy Venezuelan
crude oil by PDVSA, partially offset by increased
21
<PAGE>
processing of spot crude; costs and lower operating rates related to outages of
a coker unit and a fluid catalytic cracker unit; and a charge related to
LYONDELL-CITGO's renegotiated labor agreement.
Other income (expense). Other expense was $27 million for the year
ended December 31, 1999 as compared to $9 million for the same period in 1998.
The difference was primarily due to: (1) a $3 million gain on the sale of
Petro-Chemical Transport in 1998, (2) in September 1999, CITGO's interest in the
Texas New Mexico Pipeline was sold for a loss of $(2) million, and (3) a $7
million loss related to the sale of various PDVMR properties.
Cost of sales and operating expenses. Cost of sales and operating
expenses increased by $2,501 million, or 24%, from 1999 to 1998. (See PDV
America Cost of Sales and Operating Expenses table above.)
The Companies purchase refined products to supplement the production
from their refineries to meet marketing demands and resolve logistical issues.
The refined product purchases represented 52% and 50% of cost of sales for the
years 1999 and 1998, respectively. These refined product purchases included
purchases from LYONDELL-CITGO, Chalmette and HOVENSA. The Companies estimate
that margins on purchased products, on average, are lower than margins on
produced products due to the fact that the Companies can only receive the
marketing portion of the total margin received on the produced refined products.
However, purchased products are not segregated from the Companies produced
products and margins may vary due to market conditions and other factors beyond
the Companies' control. As such, it is difficult to measure the effects on
profitability of changes in volumes of purchased products. In the near term,
other than normal refinery turnaround maintenance, the Companies do not
anticipate operational actions or market conditions which might cause a material
change in anticipated purchased product requirements; however, there could be
events beyond the control of the Companies which impact the volume of refined
products purchased. See also "Factors Affecting Forward Looking Statements".
As a result of the invocation of the force majeure clause in its crude
oil supply contracts, the Companies estimate that the cost of crude oil
purchased in 1999 increased by $55 million from what would have otherwise been
the case.
Gross margin. The gross margin for 1999 was $525 million, or 3.9%,
compared to $655 million, or 6.0%, for 1998. In 1999, the revenue per gallon
component increased approximately 22% while the cost per gallon component
increased approximately 23%. As a result, the gross margin decreased
approximately one-tenth of a cent on a per gallon basis in 1999 compared to
1998.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased $21 million, or 8% in 1999, as a result of the
Companies' efforts to reduce such expenses and the reduction in employee
incentive compensation.
Income taxes. PDV America's provision for income taxes in 1999 was $58
million, representing an effective tax rate of 29%. In 1998, PDV America's
provision for income taxes was $131 million, representing an effective tax rate
of 36%. The effective tax rate for the current year is unusually low due to a
favorable resolution in the second quarter of 1999 of a significant tax issue in
the last Internal Revenue Service audit. During the years under audit, deferred
taxes were recorded for certain environmental expenses deducted in the tax
returns pending final determination by the Internal Revenue Service. The
deductions were allowed on audit and, accordingly, the deferred tax liability of
approximately $11 million was reversed with a corresponding benefit to tax
expense.
22
<PAGE>
Results of Operations -- 1998 Compared to 1997
Sales revenues and volumes. Sales decreased by $2,662 million,
representing a 20% decrease from 1997 to 1998. This was due to a decrease in
average sales price of 28% partially offset by an increase in sales volumes of
12%. (See PDV America Sales Revenues and Volumes table above.)
Equity in earnings (losses) of affiliates. Equity in earnings of
affiliates increased by approximately $13 million, or 18.8% from $69 million in
1997 to $82 million in 1998. This increase was due primarily to a $14 million
increase in CITGO's equity in earnings of LYONDELL-CITGO as a result of the
change in CITGO's interest in LYONDELL-CITGO which increased from approximately
13% at December 31, 1996 to approximately 42% on April 1, 1997 and the
improvement in LYONDELL-CITGO's operations since completion of its refinery
enhancement project during the first quarter of 1997. (See Consolidated
Financial Statements of PDV America - Note 2 in Item 14a.)
Cost of sales and operating expenses. Cost of sales and operating
expenses decreased by $2,692 million, or 21% from 1997 to 1998. (See PDV America
Cost of Sales and Operating Expense table above.)
The Companies purchase refined products to supplement the production
from their refineries to meet marketing demands and resolve logistical issues.
The refined product purchases represented 50% and 52% of the cost of sales for
the years 1998 and 1997, respectively. These refined product purchases included
purchases from LYONDELL-CITGO, Chalmette and HOVENSA. The Companies estimate
that margins on purchased products, on average, are lower than margins on
products due to the fact that the Companies can only receive the marketing
portion of the total margin received on the produced refined products. However,
purchased products are not segregated from the Companies' produced products and
margins may vary due to market conditions and other factors beyond the
Companies' control. As such, it is difficult to measure the effects on
profitability of changes in volumes of purchased products. The Companies
anticipate their purchased product requirements will increase, in volume and as
a percentage of refined products sold, in order to meet marketing demands,
although in the near term, other than normal refinery turnaround maintenance,
the Companies do not anticipate operational actions or market conditions which
might cause a material change in anticipated purchased product requirements;
however, there could be events beyond the control of the Companies which impact
the volume of refined products purchased. See also "Factors Affecting Forward
Looking Statements".
Gross margin. The gross margin for 1998 was $655 million compared to
$625 million for 1997. Gross margins in 1998 were positively affected by a 12%
increase in sales volume partially offset by an erosion of gross margin on a per
gallon basis which included a lower of cost or market adjustment of $172
million.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $47 million, or 22% in 1998. The increase was
due primarily to salary and related burden allocations as well as increases in
advertising expense and depreciation.
Interest expense. Interest expense decreased $29 million from 1997 to
1998. The decrease was primarily due to the decrease in average debt outstanding
related to a decrease in working capital requirements and the deferral of a
significant 1998 excise tax payment, as well as the repayment of $250 million of
the Company's Senior Notes on August 1, 1998. Also the average interest rate
decreased due to a decrease in key rates and replacement of higher rate debt
with lower rate debt.
Income taxes. PDV America's provision for income taxes in 1998 was $131
million, representing an effective tax rate of 36%. In 1997, PDV America's
provision for income taxes was $106 million,
23
<PAGE>
representing an effective tax rate of 32%. The relatively low rate in 1997 was
due primarily to the favorable resolution of a significant tax issue with the
Internal Revenue Service in the second quarter of 1997. The resolution resulted
in the reduction of a contingency reserve previously established related to this
matter. The decrease was partially offset by the recording of a valuation
allowance related to a capital loss carryforward. In 1998 the effective tax rate
decreased slightly compared to the 1996 rate due to a decrease in state taxes.
Liquidity and Capital Resources
For the year ended December 31, 1999, PDV America's net cash provided
by operating activities totaled approximately $225 million, primarily reflecting
$142 million of net income, $277 million of depreciation and amortization and
the net effect of other items of $(194) million. The more significant changes in
other items included the increase in accounts receivable, including receivables
from affiliates, of approximately $457 million, the increase in inventories of
approximately $263 million, the increase in accounts payable and other current
liabilities, including payables to affiliates, of approximately $406 million and
the increase of other assets of approximately $66 million.
Net cash used in investing activities in 1999 totaled $287 million
consisting primarily of capital expenditures of $248 million, loans to
LYONDELL-CITGO of $25 million and loan to PDVSA Finance of $38 million.
During the same period, consolidated net cash provided by financing
activities totaled approximately $141 million comprised primarily of $252
million of proceeds from revolving bank loans, offset by net repayments of other
debt of $89 million and a $22 million dividend paid to PDV Holding, Inc.
The Companies currently estimate that their capital expenditures for
the years 2000 through 2004 will total approximately $2 billion. These include:
PDV America Estimated Capital Expenditures - 2000 through 2004 (1)
Strategic $ 657 million
Maintenance 483 million
Regulatory / Environmental 712 million
-----------------
Total $1,852 million
=================
--------------------
(1) These estimates may change as future regulatory events unfold.
See "Factors Affecting Forward Looking Statements".
PDV America's notes receivable from PDVSA are unsecured and are
comprised of $250 million of 7.75% notes maturing on August 1, 2000 and $500
million of 7.995% notes maturing on August 1, 2003.
The notes receivables from affiliate (PDVSA Finance Ltd., a wholly
owned subsidiary of PDVSA), are unsecured and are comprised of two $130 million
8.558% notes maturing on November 10, 2013 and a $38 million 10.395% note
maturing on May 15, 2014.
As of December 31, 1999, PDV America and its subsidiaries had an
aggregate of $2,340 million of indebtedness outstanding that matures on various
dates through the year 2029. As of December 31, 1999, the Companies' contractual
commitments to make principal payments on this indebtedness were $330 million,
$72 million and $111 million for 2000, 2001 and 2002, respectively.
24
<PAGE>
PDV America's $750 million senior notes issued in 1993 are comprised of
(i) $250 million of 7.75% Senior Notes due August 1, 2000 and (ii) $500 million
7.875% Senior Notes due August 1, 2003 (collectively, the "Senior Notes").
Interest on these notes is payable in semiannual installments. PDV America
repaid on August 1, 1998 the $250 million 7.25% Senior Notes due August 1, 1998,
with the proceeds received from the maturity of $250 million of Mirror Notes due
from PDVSA on July 31, 1998.
CITGO's bank credit facility consists of a $400 million, five-year,
revolving bank loan and a $150 million, 364-day, revolving bank loan, both of
which are unsecured and have various borrowing maturities, of which $345 million
was outstanding at December 31, 1999. Cit-Con has a separate credit agreement
under which $14 million was outstanding at December 31, 1999. The Company's
other principal indebtedness consists of (i) $200 million in senior notes issued
in 1996, (ii) $260 million in senior notes issued pursuant to a master shelf
agreement with an insurance company, (iii) $137 million in senior notes issued
in 1991, (iv) $306 million in obligations related to tax exempt bonds issued by
various governmental units, and (v) $178 million in obligations related to
taxable bonds issued by a governmental unit. (See Consolidated Financial
Statements of PDV America -- Note 1 and 10 in Item 14a.)
PDVMR's bank credit facility consists of a $125 million revolving
credit facility, committed through April 2002, of which $117 million was
outstanding at December 31, 1999. Other indebtedness consists of $20 million in
pollution control bonds. (See Consolidated Financial Statements of PDV America
- -- Note 10 in Item 14a.)
As of December 31, 1999, capital resources available to the Companies
included cash provided by operations, available borrowing capacity of $205
million under CITGO's revolving credit facility and $184 million in unused
availability under uncommitted short-term borrowing facilities with various
banks and $8 million in unused availability under PDVMR's revolving credit
facility with various banks. Additionally, the remaining $400 million from
CITGO's shelf registration with the Securities and Exchange Commission for $600
million of debt securities may be offered and sold from time to time. The
Companies believe that they have sufficient capital resources to carry out
planned capital spending programs, including regulatory and environmental
projects in the near term, and to meet currently anticipated future obligations
as they arise. In addition, PDV America intends that payments received from
PDVSA under the Mirror Notes will provide funds to service PDV America's Senior
Notes. The Companies periodically evaluate other sources of capital in the
marketplace and anticipate long-term capital requirements will be satisfied with
current capital resources and future financing arrangements, including the
issuance of debt securities. The Companies' ability to obtain such financing
will depend on numerous factors, including market conditions and the perceived
creditworthiness of the Companies at that time. See "Factors Affecting Forward
Looking Statements".
The debt instruments of PDV America, PDVMR and CITGO impose
restrictions on PDV America's, PDVMR's and CITGO's ability to incur additional
debt, grant liens, make investments, sell or acquire fixed assets, make
restricted payments and engage in other transactions. In addition, restrictions
exist over the payment of dividends and other distributions to PDV America from
CITGO. PDV America, PDVMR and CITGO were in compliance with all their respective
covenants under such debt instruments at December 31, 1999.
The Companies are members of the PDV Holding, Inc. consolidated Federal
income tax return. CITGO has a tax allocation agreement with PDV America, which
is designed to provide PDV America with sufficient cash to pay its consolidated
income tax liabilities.
25
<PAGE>
New Accounting Standard
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). The statement establishes
accounting and reporting standards for derivative instruments and for hedging
activities. It requires that an entity recognize all derivatives, at fair value,
as either assets or liabilities in the statement of financial position with an
offset either to shareholder's equity and comprehensive income or income
depending upon the classification of the derivative. The company has not
determined the impact on its financial statements that may result from adoption
of SFAS No. 133, which is required no later than January 1, 2001.
Impending Accounting Change
The Securities and Exchange Commission ("SEC") has recently indicated
that they intend to issue a summary of their views regarding accounting for
planned major maintenance activities (See Consolidated Financial Statements of
PDV America -- Note 1 in Item 14a). Such summary is expected, in part, to defer
the issuance of guidance related to certain aspects of accounting for major
maintenance activities pending completion of a project dealing with cost
capitalization that will be conducted by the Accounting Standards Executive
Committee ("AcSEC") of the American Institute of Certified Public Accountants.
At December 31, 1999 the Companies had capitalized approximately $107 million of
such costs, all or a portion of which may be required to be written off through
an immediate charge to income as a result of the SEC and/or AcSEC conclusions.
Pending issuance of the SEC summary, the Companies plan to continue their policy
of deferring and amortizing such costs.
Year 2000 Readiness
The inability of computers, software and other equipment using
microprocessors to recognize and properly process data fields containing a
two-digit year is commonly referred to as the Year 2000 issue. Such systems may
be unable to accurately process certain date-based information. To mitigate any
adverse impact this may cause, the Companies have established a company wide
Year 2000 Project to address the issue of computer programs and embedded
computer chips which may be unable to correctly function with the Year 2000. In
addition, the Companies updated major elements of their information systems by
implementing programs purchased from Systems, Applications and Products in Data
Processing ("SAP"). The first phase of SAP implementation, which included the
financial reporting and materials management modules, was brought into
production on January 1, 1998. Additional SAP modules including plant
maintenance work order and cost tracking were implemented throughout 1998. The
light oils product scheduling, inventory and billing module and the human
resources module were brought into production on June 1 and July 1, 1999,
respectively. The total cost of the SAP implementation was approximately $125
million, which included software, hardware, reengineering and change management.
Management has determined that SAP is an appropriate solution to the Year 2000
issue related to the systems for which SAP was implemented. Such systems
comprise approximately 80 percent of CITGO's total information systems.
Remaining business software systems were made Year 2000 ready through the Year
2000 Project or they were replaced.
The Companies did not experience any significant business disruptions
or malfunctions in their operating or business systems during the transition
from 1999 to 2000. Based on operations since January 1, 2000, the Companies do
not expect any significant impact to their ongoing business as a result of Year
2000 issues. It is possible, however, that the full impact of the date
transition has not been fully recognized. For example, it is possible that
date-related issues such as quarterly or year-end processing issues may occur.
The Companies believe that any such problems are likely to be minor and
correctable.
26
<PAGE>
In addition, the Company could still be negatively affected if its customers or
suppliers are adversely affected by similar date-related issues. The Companies
are currently not aware of any significant Year 2000 or similar problems that
have arisen for their customers and suppliers.
Excluding SAP implementation, the Companies expended $18 million on
Year 2000 readiness efforts through year-end 1999. These expenditures included
identifying and remediating potential Year 2000 problems, and the associated
program administration and labor costs incurred.
Item 7 A. Quantitative and Qualitative Disclosures About Market Risk
Introduction. The Companies have exposure to price fluctuations of
crude oil and refined products as well as fluctuations in interest rates. To
manage these exposures, management has defined certain benchmarks consistent
with its preferred risk profile for the environment in which the Companies
operate and finance their assets. The Companies do not attempt to manage the
price risk related to all of their inventories of crude oil and refined
products. As a result, at December 31, 1999, the Companies were exposed to the
risk of broad market price declines with respect to a substantial portion of
their crude oil and refined product inventories. The following disclosures do
not attempt to quantify the price risk associated with such commodity
inventories.
Commodity Instruments. CITGO balances its crude oil and petroleum
product supply / demand and manages a portion of its price risk by entering into
petroleum commodity derivatives. Generally, CITGO's risk management strategies
qualify as hedges, however, certain strategies that CITGO may use on commodity
positions do not qualify as hedges.
Non Trading Commodity Derivatives
Open Positions at December 31, 1999
<TABLE>
<CAPTION>
Maturity Number of Contract Market
Commodity Derivative Date Contracts Value(2) Value
--------- ---------- ---- --------- -------- -----
($ in millions)
---------------------------------
<S> <C> <C> <C> <C> <C>
No Lead Gasoline(1) Futures Purchased 2000 60 $ 1.7 $ 1.7
Futures Sold 2000 225 $ 6.1 $ 6.4
Swaps 2000 300 $ 8.1 $ 7.8
Heating Oil(1) Futures Purchased 2000 217 $ 5.7 $ 6.0
Futures Purchased 2001 6 $ 0.1 $ 0.1
Futures Sold 2000 450 $ 12.5 $ 12.8
Swaps 2000 336 $ 7.7 $ 7.7
Crude Oil(1) Swaps 2000 600 $ 13.4 $ 14.3
Natural Gas(3) Futures Purchased 2000 6 $ 0.1 $ 0.1
- ------------------
<FN>
(1) 1,000 barrels per contract
(2) Weighted average price
(3) 10,000 mmbtu per contract
</FN>
</TABLE>
27
<PAGE>
Non Trading Commodity Derivatives
Open Positions at December 31, 1999
<TABLE>
<CAPTION>
Maturity Number of Contract Market
Commodity Derivative Date Contracts Value(2) Value
--------- ---------- ---- --------- -------- -----
($ in millions)
---------------------------------
<S> <C> <C> <C> <C> <C>
No Lead Gasoline(1) Futures Purchased 1999 500 $ 8.0 $ 8.0
Heating Oil(1) Futures Purchased 1999 371 $ 7.0 $ 6.0
Futures Sold 1999 110 $ 2.0 $ 2.0
- ------------------
<FN>
(1) 1,000 barrels per contract
(2) Weighted average price
</FN>
</TABLE>
Debt Related Instruments. CITGO has fixed and floating U.S. currency
denominated debt. CITGO uses interest rate swaps to manage its debt portfolio
toward a benchmark of 40 to 60 percent fixed rate debt to total fixed and
floating rate debt. These instruments have the effect of changing the interest
rate with the objective of minimizing CITGO's long-term costs. At December 31,
1999, CITGO's primary exposures were to U.S. dollar, LIBOR and U.S. Treasury
rates.
For interest rate swaps, the table below presents notional amounts and
interest rates by expected (contractual) maturity dates. Notional amounts are
used to calculate the contractual payments to be exchanged under the contracts.
Non Trading Interest Rate Derivatives
Open Positions at December 31, 1999 and 1998
<TABLE>
<CAPTION>
National
Fixed Principal
Variable Rate Index Expiration Date Rate Paid Amount
------------------- --------------- --------- ------
($ in millions)
<S> <C> <C> <C>
One-month LIBOR May 2000 6.28% $ 25
J.J. Kenny May 2000 4.72% 25
J.J. Kenny February 2005 5.30% 12
J.J. Kenny February 2005 5.27% 15
J.J. Kenny February 2005 5.49% 15
---------------
$ 92
===============
</TABLE>
The fair value of the interest rate swap agreements in place at
December 31, 1999, based on the estimated amount that CITGO would receive or pay
to terminate the agreements as of that date and taking into account current
interest rates, was an unrealized loss of $1.3 million.
For debt obligations, the table below presents principal cash flows and
related weighted average interest rates by expected maturity dates. Weighted
average variable rates are based on implied forward rates in the yield curve at
the reporting date.
28
<PAGE>
Debt Obligations
At December 31, 1999
<TABLE>
<CAPTION>
Expected
Expected Fixed Average Fixed Variable Average Variable
Maturities Rate Debt Interest Rate Rate Debt Interest Rate
---------- --------- ------------- --------- -------------
($ in millions) ($ in millions)
<S> <C> <C> <C> <C>
2000 $ 290 7.94% $ 40 5.72%
2001 40 9.11% 32 6.11%
2002 36 8.78% 75 6.22%
2003 560 7.98% 345 6.25%
2004 31 8.02 16 6.29%
Thereafter 391 8.02% 484 6.41%
------------ ------------ ------------ ---------
Total $ 1,348 8.04% $ 992 6.30%
============ ============ ============ =========
Fair Value $ 1,288 $ 992
============ =======
</TABLE>
Debt Obligations
At December 31, 1998
<TABLE>
<CAPTION>
Expected
Expected Fixed Average Fixed Variable Average Variable
Maturities Rate Debt Interest Rate Rate Debt Interest Rate
---------- --------- ------------- --------- -------------
($ in millions) ($ in millions)
<S> <C> <C> <C> <C>
1999 $ 40 9.11% $ 44 5.01%
2000 290 7.94% 7 5.09%
2001 40 9.11% 7 5.23%
2002 36 8.78% 45 5.31%
2003 559 7.98% 165 5.44%
Thereafter 422 8.02% 501 6.00%
------------ ------------ ------------ ---------
Total $ 1,387 8.07% $ 769 5.77%
============ ============ ============ =========
Fair Value $ 1,356 $ 769
============ =======
</TABLE>
29
<PAGE>
ITEM 8. Financial Statements and Supplementary Data
The Consolidated Financial Statements, the Notes to Consolidated
Financial Statements and the Independent Auditors' Report are included in Item
14a of this report. The Quarterly results of Operations are reported in Note 16
of the Notes to Consolidated Financial Statements included in Item 14a.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
30
<PAGE>
PART III
ITEM 10. Directors And Executive Officers Of The Registrant
The directors and executive officers of PDV America are as follows:
Name Age Position
- ---- --- --------
Luis Centeno 50 Chairman of the Board and Director,
President, Chief Executive and Financial
Officer
Jose I. Moreno 41 Secretary and Director
Jose Sifontes 45 Treasurer and Chief Accounting Officer
Directors are elected to serve until their successors are duly elected
and qualified. Executive officers are appointed by and serve at the discretion
of the Board of Directors.
Luis Centeno has been a director of PDV America and Chairman of the
Board, President, Chief Executive and Financial Officer, since November 1999.
Currently, he is the Corporate Finance Coordinator of PDVSA.
Jose I. Moreno has been a director of PDV America and Secretary since
August 1998. He has served as legal counsel to various subsidiaries of PDVSA in
Venezuela and as member of the Board of Directors in subsidiaries of PVDSA
located outside Venezuela, since 1991.
Jose Sifontes has been Treasurer and Chief Accounting Officer of PDV
America since November 1999. He has been the Corporate Finance Functional
Manager of PDVSA since September 1999.
PDV America's Board of Directors currently has no committees.
ITEM 11. Executive Compensation
For the year ended December 31, 1999, the directors and executive
officers of PDV America received compensation in the aggregate of approximately
$1,200,000.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
Not applicable.
ITEM 13. Certain Relationships and Related Transactions
PDV America is a wholly-owned, indirect subsidiary of PDVSA. As a
result, PDVSA, either directly or indirectly, nominates and selects members of
the Board of Directors of PDV America and its subsidiaries. Certain members of
the Board of Directors of PDV America are also directors and executive officers
of PDVSA.
CITGO has entered into several transactions with PDVSA or other
affiliates of PDVSA, including crude oil and feedstock supply agreements,
agreements for the purchase of refined products and transportation agreements.
Under these agreements, CITGO purchased approximately $1.7 billion of
31
<PAGE>
crude oil, feedstocks and refined products at market related prices from PDVSA
in 1999. At December 31, 1999, $178 million was included in CITGO's current
payable to affiliates as a result of its transactions with PDVSA. (See "Items 1.
and 2. Business and Properties -- Crude Oil and Refined Product Purchases").
LYONDELL-CITGO owns and operates a 265 MBPD refinery in Houston, Texas.
LYONDELL-CITGO was formed in 1993 by subsidiaries of CITGO and Lyondell,
referred to as the owners. CITGO contributed cash during the years 1993 through
1997 for a participation interest and other commitments related to
LYONDELL-CITGO's refinery enhancement project, and Lyondell contributed the
Houston refinery and related assets for the remaining participation interest.
The refinery enhancement project to increase the refinery's heavy crude oil high
conversion capacity was substantially completed at the end of 1996 with an
in-service date of March 1, 1997. The heavy crude oil processed by the Houston
refinery is supplied by PDVSA under a long-term crude oil supply agreement
through the year 2017. Under this agreements, LYONDELL-CITGO purchased
approximately $1 billion of crude oil, feedstocks at market related prices from
PDVSA in 1999. CITGO purchases substantially all of the gasoline, diesel and jet
fuel produced at the Houston refinery under a long-term contract. (See
Consolidated Financial Statements of PDV America -- Notes 3 and 4 in Item 14a).
CITGO's participation interest in LYONDELL-CITGO was approximately 41%
at December 31, 1999, in accordance with agreements between the owners
concerning such interest. CITGO has a one-time option exercisable after January
1, 2000 but before September 30, 2000, to increase, for an additional
investment, its participation interest to 50%.
CITGO loaned $25 million and $20 million to LYONDELL-CITGO during 1999
and 1998, respectively. The notes bear interest at market rates which were
approximately 6.7% at December 31, 1999 and 1998, and are due July 1, 2003.
Effective December 31, 1999, CITGO converted $33 million of these notes to
investments in LYONDELL-CITGO.
LYONDELL-CITGO has a $450 million credit facility that is due on May 5,
2000. The Owners are currently reviewing financing alternatives to address this
situation. However, there is no agreement on a definitive plan to replace this
facility and LYONDELL-CITGO does not have the funds available to repay the
facility when it becomes due. As a result of this circumstance, CITGO management
conducted a review to determine if its ability to realize the carrying value of
its investment in LYONDELL-CITGO has been impaired. Based upon this review, PDV
America's management has determined that no such impairment has occurred.
CITGO accounts for its investment in LYONDELL-CITGO using the equity
method of accounting and records its share of the net earnings of LYONDELL-CITGO
based on allocations of income agreed to by the owners.
On May 1, 1997, PDV America and Union Oil Company of California closed
a transaction relating to The UNO-VEN Company. The transaction transferred
certain assets and liabilities to PDVMR, a subsidiary of PDV America, in
liquidation of PDV America's 50% ownership interest in UNO-VEN. The assets
include a refinery in Lemont, Illinois, as well as product distribution
terminals located in the Midwest. CITGO operates these facilities and purchases
the products produced at the refinery (See Consolidated Financial Statements of
PDV America -- Note 3 in Item 14a). A portion of the crude oil processed by
PDVMR is supplied by PDVSA under a long-term crude supply contract.
An affiliate of PDVSA acquired a 50% equity interest in Chalmette in
October 1997 and has assigned to CITGO its option to purchase up to 50% of the
refined products produced at the refinery through December 31, 2000 (See
Consolidated Financial Statements of PDV America -- Note 3 in Item
32
<PAGE>
14a). CITGO acquired approximately 66 MBPD of refined products from the refinery
during 1999, approximately one-half of which was gasoline.
In October 1998 an affiliate of PDVSA acquired a 50% equity interest in
HOVENSA and has the right under a product sales agreement to assign periodically
to CITGO, or other related parties, its option to purchase 50% of the refined
products produced by HOVENSA (less a certain portion of such products that
HOVENSA will market directly in the local and Caribbean markets). In addition,
under the product sales agreement, the PDVSA affiliate has appointed CITGO as
its agent in designating which of its affiliates shall from time to time take
deliveries of the refined products available to it. The product sales agreement
will be in effect for the life of the joint venture, subject to termination
events based on default or mutual agreement (See Consolidated Financial
Statements of PDV America -- Note 2 in Item 14a). Pursuant to the above
arrangement, CITGO acquired approximately 118 MBPD of refined products from the
refinery during 1999, approximately one-half of which was gasoline.
The purchase agreements with LYONDELL-CITGO, PDVMR, Chalmette and
HOVENSA incorporate various formula prices based on published market prices and
other factors. Such purchases totaled $4.3 and $2.9 billion for 1999 and 1998,
respectively. At December 31, 1999 and 1998, $196 and $64 million, respectively,
were included in payables to affiliates as a result of these transactions.
CITGO had refined product, feedstock, crude oil and other product sales
of $190 and $164 million to affiliates, including LYONDELL-CITGO and MVPPP, in
1999 and 1998, respectively. At December 31, 1999 and 1998, $38 million and $34
million, respectively, were included in Due from affiliates as a result of these
transactions.
CITGO has guaranteed approximately $101 million of debt of certain
affiliates, including $50 million related to HOVENSA and $11 million related to
Nelson Industrial Steam Company. (See Consolidated Financial Statements of PDV
America -- Note 13 in Item 14a.)
PDVMR is party to a Contract for Purchase and Sale of Crude Oil dated
April 23, 1997, with Maraven S.A. ("Maraven"), a corporation organized and
existing, at the date of the contract, under the laws of the Bolivarian Republic
of Venezuela, and CITGO. In accordance with the contract, Maraven (or its
successor) is obligated to provide a base volume of up to 100,000 barrels per
day of Venezuelan crude, and CITGO as operator is responsible for administering
the purchase of additional volumes of crude for the refinery. The Venezuelan
crude is priced in accordance with a formula based upon posted crude prices less
a quality differential. Maraven (or its successor), CITGO and PDVMR can change
the amount and type of crude supplied in order to capture additional economic
opportunities. The term of the agreement is 60 months with renewal periods of 12
months.
PDVMR sells certain refinery by-products and utilities to The Needle
Coker Company ("Needle") and buys back hydrogen, naphtha and steam. Sales to
Needle were approximately $9 million and $13 million in 1999 and 1998,
respectively. Purchases from Needle were approximately $6 million and $13
million in 1999 and 1998, respectively.
During 1995, the Company entered into a service agreement with PDVSA to
provide financial and foreign agency services. Income from these services was
approximately $1 million, $2 million and $1 million in 1999, 1998 and 1997,
respectively.
Under a separate guarantee of rent agreement, PDVSA has guaranteed
payment of rent, stipulated loss value and terminating value due under the lease
of the Corpus Christi Refinery West Plant (See Consolidated Financial Statements
of PDV America -- Note 14 in Item 14a).
33
<PAGE>
The notes receivable from PDVSA are unsecured and are comprised of $250
million of 7.75% notes maturing on August 1, 2000 and $500 million of 7.995%
notes maturing on August 1, 2003. Interest on these notes is payable
semiannually by PDVSA to the Company on February 1 and August 1 of each year,
less one business day. Interest income attributable to such notes was
approximately $59 million, $70 million and $78 million for years ended December
31, 1999, 1998 and 1997, respectively, with approximately $25 million included
in due from affiliates at December 31, 1999 and 1998. The notes receivable from
affiliate are unsecured and are comprised of two $130 million of 8.558% notes
maturing on November 10, 2013 and a $38 million 10.395% note maturing May 15,
2014. Interest on these notes is payable quarterly. Interest income attributable
to such notes was approximately $24 million and $3 million at December 31, 1999
and 1998, respectively, with approximately $4 million and $3 million included in
due from affiliates at December 31, 1999 and 1998, respectively. Due to the
related party nature of these notes receivable, it is not practicable to
estimate their fair value.
CITGO and PDV America are parties to a tax allocation agreement that is
designed to provide PDV America with sufficient cash to pay its consolidated
income tax liabilities.
34
<PAGE>
PART IV
ITEM 14. Exhibits, Financial Statements and Reports on Form 8-K
a. Certain Documents Filed as Part of this Report
(1) Financial Statements:
Page
Independent Auditors' Report F-1
Consolidated Balance Sheets at December 31, 1999 and 1998 F-2
Consolidated Statements of Income and Comprehensive Income for each of
the years ended December 31, 1999, 1998 and 1997 F-3
Consolidated Statements of Shareholder's Equity for each of
the years ended December 31, 1999, 1998 and 1997 F-4
Consolidated Statements of Cash Flows for each of
the years ended December 31, 1999, 1998 and 1997 F-5
Notes to Consolidated Financial Statements F-7
(2) Exhibits:
The Exhibit Index in part c. below lists the exhibits that are filed as part
of, or incorporated by reference into, this report.
b. Reports on Form 8-K
None.
35
<PAGE>
c. Exhibits
Exhibit
Number Description
- ------- -----------
*3.1 Certificate of Incorporation, Certificate of Amendment of
Certificate of Incorporation and By-laws of PDV America
*4.1 Indenture, dated as of August 1, 1993, among PDV America,
Propernyn, PDVSA and Citibank, N.A., as trustee, relating to PDV
America's 7-1/4% Senior Notes Due 1998, 7-3/4% Senior Notes Due
2000 and 7-7/8% Senior Notes Due 2003
*4.2 Form of Senior Note (included in Exhibit 4.1)
*10.1 Crude Supply Agreement, dated as of September 30, 1986, between
CITGO Petroleum Corporation and Petroleos de Venezuela, S.A.
*10.2 Supplemental Crude Supply Agreement, dated as of September 30,
1986, between CITGO Petroleum Corporation and Petroleos de
Venezuela, S.A.
*10.3 Crude Oil and Feedstock Supply Agreement, dated as of March 31,
1987, between Champlin Refining Company and Petroleos de
Venezuela, S.A.
*10.4 Supplemental Crude Oil and Feedstock Supply Agreement, dated as of
March 31, 1987, between Champlin Refining Company and Petroleos de
Venezuela, S.A.
*10.5 Contract for the Purchase/Sale of Boscan Crude Oil, dated as of
June 2, 1994, between Tradecal, S.A. and CITGO Asphalt Refining
Company
*10.6 Restated Contract for the Purchase/Sale of Heavy/Extra Heavy Crude
Oil, dated December 28, 1990, among Maraven, S.A., Lagoven, S.A.,
and Seaview Oil Company
*10.7 Sublease Agreement, dated as of March 31, 1987, between Champlin
Petroleum Company, as Sublessor, and Champlin Refining Company, as
Sublessee
*10.8 Operating Agreement, dated as of May 1, 1984, among Cit-Con Oil
Corporation, CITGO Petroleum Corporation and Conoco, Inc.
*10.9 Amended and Restated Limited Liability Company Regulations of
LYONDELL-CITGO Refining Company, Ltd. dated July 1, 1993
*10.10 Contribution Agreement among Lyondell Petrochemical Company,
LYONDELL-CITGO Refining Company, Ltd. and Petroleos de Venezuela,
S.A.
- --------------------
* Previously filed in connection with the Registrant's Registration Statement
on Form F-1, Registration No. 33-63742, originally filed with the
Commission on June 2, 1993.
36
<PAGE>
*10.11 Crude Oil Supply Agreement, dated as of May 5, 1993, between
LYONDELL-CITGO Refining Company, Ltd. and Lagoven, S.A.
*10.12 Supplemental Supply Agreement, dated as of May 5, 1993, between
LYONDELL-CITGO Refining Company, Ltd. and Petroleos de Venezuela,
S.A.
*10.13 The UNO-VEN Company Partnership Agreement, dated as of December 4,
1989, between Midwest 76, Inc. and VPHI Midwest, Inc.
*10.14 Supply Agreement, dated as of December 1, 1989, between The
UNO-VEN Company and Petroleos de Venezuela, S.A.
*10.15 Supplemental Supply Agreement, dated as of December 1, 1989,
between The UNO-VEN Company and Petroleos de Venezuela, S.A.
*10.16 Tax Allocation Agreement, dated as of June 24, 1993, among PDV
America, Inc., VPHI Midwest, Inc., CITGO Petroleum Corporation and
PDV USA, Inc., as amended
**10.17 Amendment and Supplement to Supply Agreement, dated as of May 11,
1994, between The UNO-VEN Company and Tradecal, S.A., as assignee
of Petroleos de Venezuela, S.A.
***10.18 $150,000,000 Credit Agreement, dated May 13, 1998 between CITGO
Petroleum Corporation and the Bank of America National Trust and
Savings Association, The Bank of New York, the Royal Bank of
Canada and Other Financial Institutions
***10.19 $400,000,000 Credit Agreement, dated May 13, 1998 between CITGO
Petroleum Corporation and the Bank of America National Trust and
Savings Association, The Bank of New York, the Royal Bank of
Canada and Other Financial Institutions
***10.20 Limited Partnership Agreement of LYONDELL-CITGO Refining LP, dated
December 31, 1998
- -----------------------
* Previously filed in connection with the Registrant's Registration Statement
on Form F-1, Registration No. 33-63742, originally filed with the
Commission on June 2, 1993.
** Previously filed in connection with the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1994.
*** Previously filed as an Exhibit to CITGO Petroleum Corporation's ("CITGO")
Form 10-K (File No. 1-14380) and incorporated herein by this reference.
37
<PAGE>
***10.21 Loan agreement with PDVSA Finance Ltd. consisting of a Promissory
Note in the amount of $130,000,000, dated November 10, 1998
***10.22 Loan agreement with PDVSA Finance Ltd. consisting of a Promissory
Note in the amount of $130,000,000, dated November 10, 1998
10.23 Loan agreement with PDVSA Finance Ltd. consisting of a Promissory
Note in the amount of $38,000,000, dated July 2, 1999
12.1 Computation of Ratio of Earnings to Fixed Charges
21.1 List of Subsidiaries of the Registrant
27.1 Financial Data Schedule
- -----------------------
* Previously filed in connection with the Registrant's Registration Statement
on Form F-1, Registration No. 33-63742, originally filed with the
Commission on June 2, 1993.
** Previously filed in connection with the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1994.
*** Previously filed as an Exhibit to PDV America's Form 10-K for the fiscal
year ended December 31, 1998.
38
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on March 30, 2000.
PDV AMERICA, INC.
By /s/ Luis Centeno
---------------------------------
Luis Centeno
President, Chief Executive and
Financial Officer, Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
By /s/ Luis Centeno President, Chief Executive March 30, 2000
---------------------------- and Financial Officer,
Luis Centeno Director
By /s/ Jose I. Moreno Secretary, Director March 30, 2000
----------------------------
Jose I. Moreno
By /s/ Jose Sifontes Treasurer, Chief Accounting March 30, 2000
---------------------------- Officer
Jose Sifontes
39
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholder of
PDV America, Inc.
We have audited the accompanying consolidated balance sheets of PDV America,
Inc. and subsidiaries (the "Company") as of December 31, 1999 and 1998, and the
related consolidated statements of income and comprehensive income,
shareholder's equity and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of PDV America, Inc. and subsidiaries
at December 31, 1999 and 1998, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1999 in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
New York, New York
February 11, 2000
F-1
<PAGE>
<TABLE>
<CAPTION>
PDV AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(Dollars in Thousands)
- ----------------------------------------------------------------------------------------
ASSETS 1999 1998
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 113,414 $ 34,822
Accounts receivable - net 1,027,352 592,315
Due from affiliates 42,340 52,666
Inventories 1,097,923 835,128
Current portion of notes receivable from PDVSA 250,000 -
Prepaid expenses and other 16,949 85,571
----------- ------------
Total current assets 2,547,978 1,600,502
NOTES RECEIVABLE FROM PDVSA AND AFFILIATE 798,000 1,010,000
PROPERTY, PLANT AND EQUIPMENT - Net 3,417,815 3,420,053
RESTRICTED CASH 3,015 9,436
INVESTMENTS IN AFFILIATES 758,812 807,659
OTHER ASSETS 219,946 227,760
----------- ------------
TOTAL $ 7,745,566 $ 7,075,410
=========== ============
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Short-term bank loans $ 16,000 $ 37,000
Accounts payable 780,660 492,090
Due to affiliates 281,428 158,956
Taxes other than income 218,503 219,642
Other current liabilities 208,394 247,966
Income taxes payable 6,367 1,607
Current portion of deferred income taxes 9,716 -
Current portion of long-term debt 314,078 47,078
Current portion of capital lease obligation 16,356 14,660
----------- ------------
Total current liabilities 1,851,502 1,218,999
LONG-TERM DEBT 2,010,223 2,071,843
CAPITAL LEASE OBLIGATION 85,570 101,926
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS 212,871 200,281
OTHER NONCURRENT LIABILITIES 230,189 230,007
DEFERRED INCOME TAXES 607,213 621,463
MINORITY INTEREST 29,710 29,559
----------- ------------
COMMITMENTS AND CONTINGENCIES (Note 13)
SHAREHOLDER'S EQUITY:
Common stock, $1.00 par value - authorized,
issued and outstanding, 1,000 shares 1 1
Additional capital 1,532,435 1,532,435
Retained earnings 1,189,066 1,068,896
Accumulated other comprehensive income (3,214) -
------------ ------------
Total shareholder's equity 2,718,288 2,601,332
------------ ------------
TOTAL $ 7,745,566 $ 7,075,410
============ ============
See notes to consolidated financial statements.
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
PDV AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME
THREE YEARS ENDED DECEMBER 31, 1999
(Dollars in Thousands)
- ---------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
<S> <C> <C> <C>
REVENUES:
Net sales $13,135,695 $ 10,780,691 $13,394,608
Sales to affiliates 196,137 179,556 227,595
----------- ------------ -----------
13,331,832 10,960,247 13,622,203
Equity in earnings (losses) of affiliates 22,161 82,338 68,930
Interest income from PDVSA 83,645 73,152 77,725
Other income (expense) - net (27,350) (8,669) (14,487)
----------- ------------ -----------
13,410,288 11,107,068 13,754,371
----------- ------------ -----------
COST OF SALES AND EXPENSES:
Cost of sales and operating expenses (including
purchases of $5,002,127, $3,576,056, and $4,275,607
from affiliates) 12,807,227 10,305,535 12,997,592
Selling, general and administrative expenses 237,144 258,366 211,423
Interest expense:
Capital leases 12,715 14,235 15,597
Other 152,636 166,006 193,868
Minority interest 151 1,223 1,706
----------- ------------ -----------
13,209,873 10,745,365 13,420,186
----------- ------------ -----------
INCOME BEFORE INCOME TAXES 200,415 361,703 334,185
INCOME TAXES 58,230 130,985 106,168
----------- ------------ -----------
NET INCOME 142,185 230,718 228,017
OTHER COMPREHENSIVE INCOME -
Minimum pension liability adjustment, net of
deferred tax benefit of $2,012 (3,214) - -
----------- ------------ -----------
COMPREHENSIVE INCOME $ 138,971 $ 230,718 $ 228,017
=========== ============ ===========
See notes to consolidated financial statements.
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
PDV AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
THREE YEARS ENDED DECEMBER 31, 1999
(Dollars in Thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated
Other Total
Common Stock Additional Retained Comprehensive Shareholder's
Shares Amount Capital Earnings Income Equity
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997 1 $ 1 $1,232,435 $ 878,639 $ - $ 2,111,075
Capital contributions received from
parent - - 250,000 - - 250,000
Net income - - - 228,017 - 228,017
------ ------ --------- ---------- -------- -----------
BALANCE, DECEMBER 31, 1997 1 1 1,482,435 1,106,656 - 2,589,092
Capital contributions received from - - 50,000 - - 50,000
parent
Dividend distribution - - - (268,478) - (268,478)
Net income - - - 230,718 - 230,718
------ ------ --------- ---------- -------- -----------
BALANCE, DECEMBER 31, 1998 1 1 1,532,435 1,068,896 - 2,601,332
Other comprehensive income:
Minimum pension liability adjustment - - - - (3,214) (3,214)
Net income - - - 142,185 - 142,185
Dividend paid - - - (22,015) - (22,015)
------ ------ --------- ---------- -------- -----------
BALANCE, DECEMBER 31, 1999 1 $ 1 $1,532,435 $1,189,066 $ (3,214) $ 2,718,288
====== ===== ========== ========== ======== ===========
See notes to consolidated financial statements.
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
PDV AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE YEARS ENDED DECEMBER 31, 1999
(Dollars in Thousands)
- ------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 142,185 $ 230,718 $ 228,017
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 276,916 265,125 240,523
Provision for losses on accounts receivable 15,110 13,826 17,827
Loss (gain) on sale of investments 1,616 (2,590) -
Deferred income taxes 73,466 72,593 82,145
Distributions in excess of equity in
earnings of affiliates 82,847 46,180 33,506
Inventory adjustment to market - 171,600 -
Postretirement benefits - 516 (10,605)
Other adjustments 18,162 (259) 7,397
Change in operating assets and liabilities, exclusive of
acquisitions of businesses:
Accounts receivable and due from affiliates (456,734) 85,930 325,358
Inventories (262,795) (6,456) (95,107)
Prepaid expenses and other current assets 4,688 (9,687) 6,380
Accounts payable and other 406,325 (113,088) (320,263)
Income taxes payable 4,760 (9,867) (15,934)
Other assets (66,324) (79,118) (86,934)
Other liabilities (15,523) 45,236 34,417
----------- ----------- -----------
Net cash provided by operating activities 224,699 710,659 446,727
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (248,042) (230,195) (264,377)
Proceeds from sales of property, plant and equipment 16,495 26,722 28,194
Loan to affiliate (38,000) (260,000) -
Proceeds from notes receivable from PDVSA - 250,000 -
Decrease (increase) in restricted cash 6,421 (2,516) 2,449
Investments in LYONDELL-CITGO
Refining LP - - (45,635)
Loans to LYONDELL-CITGO
Refining LP (24,600) (19,800) (16,509)
Proceeds from sale of investments 4,980 7,160 -
Investments in and advances to other affiliates (4,212) (3,247) (2,442)
----------- ------------ ------------
Net cash used in investing activities (286,958) (231,876) (298,320)
----------- ------------ ------------
(Continued)
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
PDV AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE YEARS ENDED DECEMBER 31, 1999
(Dollars in Thousands)
- --------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from (repayments of) revolving bank loans $ 252,000 $ (47,000) $ (106,000)
Net (repayments of) proceeds from short-term bank loans (21,000) 34,000 (50,000)
Payments on term bank loan - (58,823) (29,412)
Payments on private placement senior notes (39,935) (308,686) (58,685)
Payments on UHS business purchase liability (6,427) (7,191) -
(Payments on) proceeds from taxable bonds (25,000) 100,000 -
Proceeds from issuance of tax-exempt bonds 25,000 47,200 -
Dividends paid to parent (22,015) (268,478) -
Payments of capital lease obligations (14,660) (13,140) (11,778)
Repayments of other debt (7,112) (7,111) (5,109)
Capital contributions received from parent - 50,000 250,000
Payment of UNO-VEN notes - - (135,000)
----------- ----------- ------------
Net cash provided by (used in) financing activities 140,851 (479,229) (145,984)
----------- ------------ ------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 78,592 (446) 2,423
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 34,822 35,268 32,845
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 113,414 $ 34,822 $ 35,268
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest (net of amount capitalized) $ 160,226 $ 184,376 $ 212,355
=========== =========== ===========
Income taxes (net of refunds) $ (16,428) $ 60,392 $ 48,639
=========== =========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING ACTIVITIES:
Investment in LYONDELL-CITGO Refining LP
(Note 2) $ (32,654) $ - $ -
=========== =========== ===========
See notes to consolidated financial statements.
(Concluded)
</TABLE>
F-6
<PAGE>
PDV AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - PDV America, Inc. (the "Company") was incorporated
on November 14, 1986 and is a wholly-owned subsidiary, effective April 21,
1997, of PDV Holding, Inc. ("PDV Holding"), a Delaware corporation (see
below). The Company's ultimate parent is Petroleos de Venezuela, S.A.
("PDVSA"), the national oil company of the Bolivarian Republic of
Venezuela.
On April 21, 1997, Propermyn B.V. ("Propermyn"), a Dutch limited liability
company whose ultimate parent is PDVSA and which held all of the Company's
common stock, contributed its shares of the Company to PDV Holding.
Description of Business - The Companies (as defined below) manufacture or
refine and market quality transportation fuels as well as lubricants,
refined waxes, petrochemicals, asphalt and other industrial products.
CITGO (as defined below) owns and operates two modern, highly complex
crude oil refineries (Lake Charles, Louisiana, and Corpus Christi, Texas)
and two asphalt refineries (Paulsboro, New Jersey, and Savannah, Georgia)
with a combined aggregate rated crude oil refining capacity of 582
thousand barrels per day ("MBPD"). CITGO also owns a minority interest in
LYONDELL-CITGO Refining L.P., a limited partnership (formerly a limited
liability company) that owns and operates a refinery in Houston, Texas,
with a rated crude oil refining capacity of 265 MBPD. CITGO also operates
a 167 MBPD refinery in Lemont, Illinois, owned by PDVMR (as defined
below). CITGO's assets also include a 65% owned lubricant and wax plant,
pipelines, and equity interests in pipeline companies and petroleum
storage terminals. Transportation fuel customers include primarily CITGO
branded wholesale marketers, convenience stores and airlines located
primarily east of the Rocky Mountains. Asphalt is generally marketed to
independent paving contractors on the east coast of the United States.
Lubricants are sold to independent marketers, mass marketers and
industrial customers. Petrochemical feedstocks and industrial products are
sold to various manufacturers and industrial companies throughout the
United States. Petroleum coke is sold primarily in international markets.
Principles of Consolidation - The consolidated financial statements
include the accounts of the Company, its wholly-owned subsidiaries
including PDV USA, Inc., CITGO Petroleum Corporation ("CITGO") and its
wholly-owned subsidiaries, Cit-Con Oil Corporation, which is 65% owned by
CITGO and VPHI Midwest, Inc. ("Midwest") and its wholly-owned subsidiary,
PDV Midwest Refining, L.L.C. ("PDVMR") (collectively, the "Companies").
All material intercompany transactions and accounts have been eliminated.
Prior to May 1, 1997, Midwest had a 50% interest in the UNO-VEN Company
("UNO-VEN"), an Illinois general partnership. Beginning May 1, 1997,
pursuant to the Partnership Interest Retirement Agreement (Note 8), PDVMR
now owns certain UNO-VEN assets, as defined. Accordingly, the consolidated
financial statements reflect the equity in earnings of UNO-VEN through
April 30, 1997 (see Note 8) and the results of operations of PDVMR on a
consolidated basis since May 1, 1997.
The Companies' investments in less than majority owned affiliates are
accounted for by the equity method. The excess of the carrying value of
the investments over the equity in the underlying net assets of the
affiliates is amortized on a straight-line basis over 40 years, which is
based upon the estimated useful lives of the affiliates' assets.
F-7
<PAGE>
Estimates, Risks and Uncertainties - The preparation of financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The Companies' operations are sensitive to domestic and international
political, legislative, regulatory and legal environments. In addition,
significant changes in the prices or availability of crude oil and refined
products could have a significant impact on the results of operations for
any particular year.
Impairment of Long-Lived Assets - The Companies periodically evaluate the
carrying value of long-lived assets to be held and used when events and
circumstances warrant such a review. The carrying value of a long-lived
asset is considered impaired when the separately identifiable anticipated
undiscounted net cash flow from such asset is less than its carrying
value. In that event, a loss is recognized based on the amount by which
the carrying value exceeds the fair value of the long-lived asset. Fair
value is determined primarily using the anticipated net cash flows
discounted at a rate commensurate with the risk involved. Losses on
long-lived assets to be disposed of are determined in a similar manner,
except that fair values are reduced for disposal costs.
Revenue Recognition - Revenue is recognized upon transfer of title to
products sold, based upon the terms of delivery.
Supply and Marketing Activities - The Companies engage in the buying and
selling of crude oil to supply their refineries. The net results of this
activity are recorded in cost of sales. The Companies also engage in the
buying and selling of refined products to facilitate the marketing of
their refined products. The results of this activity are recorded in cost
of sales and sales.
Refined product exchange transactions that do not involve the payment or
receipt of cash are not accounted for as purchases or sales. Any resulting
volumetric exchange balances are accounted for as inventory in accordance
with the Companies' last-in, first-out ("LIFO") inventory method.
Exchanges that are settled through payment or receipt of cash are
accounted for as purchases or sales.
Excise Taxes - The Companies collect excise taxes on sales of gasoline and
other motor fuels. Excise taxes of approximately $3.1 billion, $3.0
billion and $3.2 billion were collected from customers and paid to various
governmental entities in 1999, 1998 and 1997, respectively. Excise taxes
are not included in sales.
Cash and Cash Equivalents - Cash and cash equivalents consist of highly
liquid short-term investments and bank deposits with initial maturities of
three months or less.
Restricted Cash - Restricted cash represents highly liquid, short-term
investments held in trust accounts in accordance with a tax-exempt bond
agreement. Funds are released solely for financing construction of
environmental facilities as defined in the bond agreements.
Inventories - Crude oil and refined product inventories are stated at the
lower of cost or market and cost is determined using the LIFO inventory
method. Materials and supplies are valued using the average cost method.
Property, Plant and Equipment - Property, plant and equipment is reported
at cost, less accumulated depreciation. Depreciation is based upon the
estimated useful lives of the related assets using the straight-line
method. Depreciable lives are generally as follows: buildings and
leaseholds - 10 to 25 years; machinery and equipment - 3 to 25 years; and
vehicles - 3 to 10 years.
F-8
<PAGE>
Upon disposal or retirement of property, plant and equipment, the cost and
related accumulated depreciation are removed from the accounts and any
resulting gain or loss is recognized in income.
The Companies capitalize interest on projects when construction takes
considerable time and entails major expenditures. Such interest is
allocated to property, plant and equipment and amortized over the
estimated useful lives of the related assets. Capitalized interest
approximated $7 million, $5 million and $8 million in 1999, 1998 and 1997,
respectively.
Commodity and Interest Rate Derivatives - The Companies use commodity and
financial instrument derivatives to manage defined interest rate and
commodity price risks arising out of the Companies' core activities. The
Companies have only limited involvement with other derivative financial
instruments, and do not use them for trading purposes.
The Companies enter into petroleum futures contracts, options and other
over the counter commodity derivatives, primarily to hedge a portion of
the price risk associated with crude oil and refined products. In order
for a transaction to qualify for hedge accounting, the Companies require
that the item to be hedged exposes the Companies to price risk and that
the commodity contract reduces that risk and is designated as a hedge. The
high correlation between price movements of a product and the commodity
contract in that product is well demonstrated in the petroleum industry
and, generally, the Companies rely on those historical relationships and
on periodic comparisons of market price changes to price changes of
futures and options contracts accounted for as hedges. Gains or losses on
contracts which qualify as hedges are recognized when the related
inventory is sold or the hedged transaction is consummated. Changes in the
market value of commodity derivatives which are not hedges are recorded as
gains or losses in the period in which they occur.
The Companies also enter into various interest rate swap and cap
agreements to manage their risk related to interest rate changes on their
debt. Premiums paid for purchased interest rate swap and cap agreements
are amortized to interest expense over the terms of the agreements.
Unamortized premiums are included in other assets. The interest rate
differentials received or paid by the Companies related to these
agreements are recognized as adjustments to interest expense over the term
of the agreements. Gains or losses on terminated swap agreements are
either amortized over the original term of the swap agreement if the
hedged borrowings remain in place or are recognized immediately if the
hedged borrowings are no longer held.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities. The statement establishes accounting
and reporting standards for derivative instruments and for hedging
activities. It requires that an entity recognize all derivatives, at fair
value, as either assets or liabilities in the statement of financial
position with an offset either to shareholder's equity and comprehensive
income or income depending upon the classification of the derivative. The
Companies have not determined the impact on their financial statements
that may result from adoption of SFAS No. 133, which is required no later
than January 1, 2001.
Refinery Maintenance - Costs of major refinery turnaround maintenance are
charged to operations over the estimated period between turnarounds.
Turnaround periods range approximately from one to eight years.
Unamortized costs are included in other assets. Amortization of refinery
turnaround costs is included in depreciation and amortization expense.
Amortization was $58 million, $58 million and $57 million for 1999, 1998
and 1997, respectively. Ordinary maintenance is expensed as incurred.
The Securities and Exchange Commission is considering issuing a notice
which will require companies to expense the non-capital portion of major
maintenance costs as incurred. The notice will require that any existing
unamortized non-capital maintenance costs be expensed immediately. The
Company estimates that the pre-tax charge to income from this change will
be approximately $107 million. It is
F-9
<PAGE>
likely that this change will be required by June 30, 2000 and will be
reported as a cumulative effect of an accounting change in the
consolidated statement of income.
Environmental Expenditures - Environmental expenditures that relate to
current or future revenues are expensed or capitalized as appropriate.
Expenditures that relate to an existing condition caused by past
operations and do not contribute to current or future revenue generation
are expensed. Liabilities are recorded when environmental assessments
and/or cleanups are probable, and the costs can be reasonably estimated.
Environmental liabilities are not discounted to their present value.
Subsequent adjustments to estimates, to the extent required, may be made
as more refined information becomes available.
Income Taxes - The Companies account for income taxes using an asset and
liability approach, in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 109, Accounting for Income Taxes.
Reclassifications - Certain reclassifications have been made to the 1997
and 1998 financial statements to conform with the classifications used in
1999.
2. INVESTMENT IN LYONDELL-CITGO REFINING LP
LYONDELL-CITGO Refining LP ("LYONDELL-CITGO") owns and operates a 265
thousand barrel per day refinery in Houston, Texas. LYONDELL-CITGO was
formed in 1993 by subsidiaries of CITGO and Lyondell Chemical Company
("Lyondell"), referred to as the Owners. CITGO contributed cash for a
participation interest and other commitments related to LYONDELL-CITGO's
refinery enhancement project, and Lyondell contributed the Houston
refinery and related assets for the remaining participation interest. The
refinery enhancement project to increase the refinery's heavy crude oil
high conversion capacity was substantially completed at the end of 1996
with an in-service date of March 1, 1997. The heavy crude oil processed by
the Houston refinery is supplied by a subsidiary of PDVSA under a
long-term crude oil supply contract that expires 2017. In April 1998, the
crude oil supplier exercised its contractual rights and reduced deliveries
of crude oil to LYONDELL-CITGO. LYONDELL-CITGO has been required to obtain
alternative sources of crude oil supply in replacement which has resulted
in lower operating margins. CITGO purchases substantially all of the
refined products produced at the Houston refinery under a long-term
contract (Note 3).
CITGO's participation interest in LYONDELL-CITGO was approximately 41% at
December 31, 1999. CITGO has a one-time option to increase, for an
additional investment, its participation interest to 50%. This option may
be exercised after January 1, 2000 but not later than September 30, 2000.
CITGO loaned $24.6 million, $19.8 million and $16.5 million to
LYONDELL-CITGO during 1999, 1998 and 1997, respectively. The notes bear
interest at market rates which were approximately 6.7%, 5.9% and 5.9% at
December 31, 1999, 1998 and 1997, and are due July 1, 2003. These notes
are included in other assets in the accompanying consolidated balance
sheets. Effective December 31, 1999, CITGO converted $32.7 million of
these notes to investments in LYONDELL-CITGO.
F-10
<PAGE>
CITGO accounts for its investment in LYONDELL-CITGO using the equity
method of accounting and records its share of the net earnings of
LYONDELL-CITGO based on allocations of income agreed to by the Owners.
Information on CITGO's investment in LYONDELL-CITGO follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------
1999 1998 1997
(000s Omitted)
<S> <C> <C> <C>
Carrying value of investment $ 560,227 $ 597,373 $ 630,060
Notes receivable 28,255 36,309 16,509
Participation interest 41% 41% 42%
Equity in net income $ 924 $58,827 $44,429
Cash distributions received 70,724 91,763 64,734
Summary of financial position:
Current assets $ 219,000 $ 197,000 $ 243,000
Noncurrent assets 1,406,000 1,440,000 1,438,000
Current liabilities 697,000 203,000 293,000
Noncurrent liabilities 316,000 785,000 715,000
Member's equity 612,000 649,000 673,000
Summary of operating results:
Revenue $2,571,000 $2,055,000 $2,697,000
Gross profit 133,000 291,000 255,000
Net income 24,000 169,000 147,000
</TABLE>
LYONDELL-CITGO has a $450 million credit facility that is due on May 5,
2000. The Owners are currently reviewing financing alternatives to address
this situation; however, there is no agreement on a definitive plan to
replace this facility and LYONDELL-CITGO does not have the funds available
to repay the facility when it becomes due. As a result of this
circumstance, CITGO management conducted a review to determine if its
ability to realize the carrying value of its investment in LYONDELL-CITGO
has been impaired. Based upon this review, CITGO management has determined
that no such impairment has occurred.
3. RELATED PARTY TRANSACTIONS
CITGO purchases approximately one-half of the crude oil processed in its
refineries from subsidiaries of PDVSA under long-term supply agreements.
These supply agreements extend through the year 2006 for the Lake Charles
refinery, 2010 for the Paulsboro refinery, 2012 for the Corpus Christi
refinery and 2013 for the Savannah refinery. CITGO purchased $1.7 billion,
$1.4 billion, and $2 billion of crude oil, feedstocks and other products
from wholly-owned subsidiaries of PDVSA in 1999, 1998, and 1997,
respectively, under these and other purchase agreements. During 1999,
PDVSA deliveries of crude oil to CITGO were less than contractual base
volumes due to PDVSA declaration of force majeure pursuant to all four
long-term crude oil supply contracts described above. As a result, CITGO
has been required to obtain alternative sources of crude oil, which has
resulted in lower operating margins. It is not possible to forecast the
future financial impacts of these reductions in crude oil deliveries on
CITGO's margins because the correlation between crude oil and refined
product prices is not constant over time and the duration of force majeure
cannot be predicted.
Additionally, during the second half of 1999, PDVSA did not deliver naptha
pursuant to one of the contracts and has made contractually specified
payments in lieu thereof.
The crude oil supply contracts incorporate formula prices based on the
market value of a number of refined products deemed to be produced from
each particular crude oil, less: (i) certain deemed refining
F-11
<PAGE>
costs adjustable for inflation, (ii) certain actual costs, including
transportation charges, import duties and taxes and (iii) a deemed margin,
which varies according to the grade of crude oil. At December 31, 1999 and
1998, $178 million and $74 million, respectively, were included in
payables to affiliates as a result of these transactions.
An affiliate of PDVSA acquired a 50% equity interest in a refinery in
Chalmette, Louisiana ("Chalmette"), in October 1997 and has assigned to
CITGO its option to purchase up to 50% of the refined products produced at
the refinery, through December 31, 2000. CITGO exercised this option on
November 1, 1997, and acquired approximately 66 MBPD and 65 MBPD of
refined products from the refinery in 1999 and 1998, respectively,
approximately one-half of which was gasoline.
Other affiliates of PDVSA entered into an agreement to acquire a combined
50% equity interest in an integrated vacuum/coker facility at Phillips'
oil refinery under construction in Sweeny, Texas ("Sweeny"), on October
30, 1998.
In October 1998, an affiliate of PDVSA acquired a 50% equity interest in a
joint venture that owns and operates a refinery in St. Croix, U.S. Virgin
Islands ("HOVENSA") and has the right under a product sales agreement to
assign periodically to CITGO, or other related parties, its option to
purchase 50% of the refined products produced by HOVENSA (less a certain
portion of such products that HOVENSA will market directly in the local
and Caribbean markets). In addition, under the product sales agreement,
the PDVSA affiliate has appointed CITGO as its agent in designating which
of its affiliates shall from time to time take deliveries of the refined
products available to it. The product sales agreement will be in effect
for the life of the joint venture, subject to termination events based on
default or mutual agreement. Pursuant to the above arrangement, CITGO
began acquiring approximately 118 MBPD and 120 MBPD of refined products
from HOVENSA during 1999 and 1998, respectively, approximately one-half of
which was gasoline.
CITGO also purchases refined products from various other affiliates
including LYONDELL-CITGO, HOVENSA and Chalmette under long-term contracts.
These agreements incorporate various formula prices based on published
market prices and other factors. Such purchases totaled $3.3 billion, $2.1
billion and $2.0 billion for 1999, 1998 and 1997, respectively. At
December 31, 1999 and 1998, $121 million and $44 million, respectively,
was included in payables to affiliates as a result of these transactions.
CITGO had refined product, feedstock, and other product sales to
affiliates of $190 million, $164 million and $221 million in 1999, 1998
and 1997, respectively. CITGO's sales of crude oil to affiliates were $37
million, $18 million and $3 million in 1999, 1998 and 1997, respectively.
At December 31, 1999 and 1998, $38 million and $34 million, respectively,
were included in due from affiliates as a result of these and related
transactions.
Pursuant to the Refinery Agreement with PDVMR, on May 1, 1997, CITGO has
been appointed operator of the PDVMR refinery. The term of the agreement
is 60 months and shall be automatically renewed for periods of 12 months
(subject to early termination as provided in the agreement). CITGO
employed the substantial majority of employees previously employed by
UNO-VEN and, as a result, CITGO assumed a liability for post retirement
benefits other than pensions of $27 million related to those employees.
CITGO also purchases the products produced at the refinery.
PDVMR is party to a Contract for Purchase and Sale of Crude Oil dated
April 23, 1997, with Maraven S.A. ("Maraven"), a corporation organized and
existing, at the date of the contract, under the laws of the Bolivarian
Republic of Venezuela, and CITGO. In accordance with the contract, Maraven
(or its successor) is obligated to provide a base volume of up to 100,000
barrels per day of Venezuelan crude, and CITGO as operator is responsible
for administering the purchase of additional volumes of crude for the
refinery. The Venezuelan crude is priced in accordance with a formula
based upon posted crude
F-12
<PAGE>
prices less a quality differential. Maraven (or its successor), CITGO and
PDVMR can change the amount and type of crude supplied in order to capture
additional economic opportunities. The term of the agreement is 60 months
with renewal periods of 12 months.
PDVMR sells certain refinery by-products and utilities to The Needle Coker
Company ("Needle") and buys back hydrogen, naphtha and steam. Sales to
Needle were approximately $9 million and $13 million in 1999 and 1998,
respectively. Purchases from Needle were approximately $6 million and $13
million in 1999 and 1998, respectively.
During 1995, the Company entered into a service agreement with PDVSA to
provide financial and foreign agency services. Income from these services
was $0.9 million, $1.7 million and $0.9 million in 1999, 1998 and 1997,
respectively.
Under a separate guarantee of rent agreement, PDVSA has guaranteed payment
of rent, stipulated loss value and terminating value due under the lease
of the Corpus Christi refinery facilities described in Note 14. The
Company has also guaranteed debt of certain affiliates (Note 13).
The notes receivable from PDVSA are unsecured and are comprised of $250
million of 7.75% notes maturing on August 1, 2000 and $500 million of
7.995% notes maturing on August 1, 2003. Interest on these notes is
payable semiannually by PDVSA to the Company on February 1 and August 1 of
each year, less one business day. Interest income attributable to such
notes was approximately $59 million, $70 million and $78 million for the
years ended December 31, 1999, 1998 and 1997, respectively, with
approximately $25 million included in due from affiliates at December 31,
1999 and 1998. The notes receivable from affiliate are unsecured and are
comprised of two $130 million of 8.558% notes maturing on November 10,
2013 and a $38 million 10.395% note maturing May 15, 2014. Interest on
these notes is payable quarterly. Interest income attributable to such
notes was approximately $24 million and $3 million at December 31, 1999
and 1998, respectively, with approximately $4 million and $3 million
included in due from affiliates at December 31, 1999 and 1998,
respectively. Due to the related party nature of these notes receivable,
it is not practicable to estimate their fair value.
F-13
<PAGE>
4. ACCOUNTS RECEIVABLE
1999 1998
(000s Omitted)
Trade $ 931,615 $ 541,613
Credit card 93,132 47,096
Other 20,831 23,051
----------- -----------
1,045,578 611,760
Less allowance for uncollectible accounts (18,226) (19,445)
----------- -----------
$ 1,027,352 $ 592,315
=========== ===========
Sales are made on account, based on pre-approved unsecured credit terms
established by CITGO management. CITGO also has a proprietary credit card
program which allows retail consumers to purchase fuel and convenience
items at CITGO branded outlets. Allowances for uncollectible accounts are
established based on several factors that include, but are not limited to,
analysis of specific customers, historical trends, current economic
conditions and other information.
CITGO has two limited purpose subsidiaries, CITGO Funding Corporation and
CITGO Funding Corporation II, which have non-recourse agreements to sell
trade accounts and credit card receivables. Under the terms of the
agreements, new receivables are added to the pool as collections reduce
previously sold receivables. The amounts sold at any one time are limited
to a maximum of $125 million of trade accounts receivable and $150 million
of credit card receivables. These agreements expire on June 22, 2000 and
May 8, 2000, respectively, and are renewable for successive one-year terms
by mutual agreement. Fees and expenses of $15.2 million, $16.1 million and
$5.8 million related to the agreements were recorded as other expense
during the years ended December 31, 1999, 1998 and 1997, respectively.
5. INVENTORIES
1999 1998
(000s Omitted)
Refined product $ 814,785 $580,666
Crude oil 215,248 186,503
Materials and supplies 67,890 67,959
---------- --------
$1,097,923 $835,128
========== ========
Inventories at December 31, 1998 were carried at estimated net market
value which was $171.6 million lower than historical cost. At December 31,
1999, estimated net market values exceeded historical cost by
approximately $418 million, and accordingly, no write-down was necessary.
F-14
<PAGE>
6. PROPERTY, PLANT AND EQUIPMENT
1999 1998
(000s Omitted)
Land $ 138,684 $ 140,047
Building 494,474 498,066
Machinery and equipment 3,748,813 3,509,505
Vehicles 26,131 34,434
Construction in process 138,979 186,436
---------- ----------
4,547,081 4,368,488
Accumulated depreciation and amortization (1,129,266) (948,435)
---------- ----------
$3,417,815 $3,420,053
========== ==========
Depreciation expense for 1999, 1998, and 1997 was $214 million, $203
million, and $178 million, respectively.
In 1997, CITGO incurred property damages from a fire at its Corpus
Christi, Texas refinery (Note 13). Other income (expense) for the year
ended December 31, 1997 includes $9.4 million of gains from insurance
recoveries related to this event.
Other income (expense) includes gains and losses on disposals and
retirements of property, plant and equipment. Such net losses were
approximately $18 million, $0 million and $13 million in 1999, 1998, and
1997, respectively.
7. INVESTMENT IN AFFILIATES
CITGO - In addition to LYONDELL-CITGO (Note 2), CITGO's investments in
affiliates consist of equity interests of 6.8 to 50% in joint interest
pipelines and terminals, including a 13.98% interest in Colonial Pipeline
Company; a 49.5% partnership interest in Nelson Industrial Steam Company
("NISCO"), which is a qualified cogeneration facility; and a 49%
partnership interest in Mount Vernon Phenol Plant. The carrying value of
these investments exceeded CITGO's equity in the underlying net assets by
approximately $143 million and $151 million at December 31, 1999 and 1998,
respectively.
At December 31, 1999 and 1998, NISCO had a partnership deficit. CITGO's
share of this deficit, as a general partner, was $60.3 million and $56.5
million at December 31, 1999 and 1998, respectively, which is included in
other noncurrent liabilities in the accompanying consolidated balance
sheets.
Information on CITGO's investments, including LYONDELL-CITGO, follows:
1999 1998
(000s Omitted)
Investments in affiliates (excluding NISCO) $ 734,822 $ 781,481
Equity in net income of affiliates 21,348 77,105
Dividends and distributions received from
affiliates 102,339 122,044
F-15
<PAGE>
Selected financial information provided by the affiliates is summarized as
follows:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------
1999 1998 1997
(000s Omitted)
<S> <C> <C> <C>
Summary of financial position:
Current assets $ 469,101 $ 464,047 $ 511,848
Noncurrent assets 2,853,786 2,817,165 2,830,568
Current liabilities 1,034,181 670,045 627,296
Noncurrent liabilities 1,681,558 1,934,378 2,025,709
Summary of operating results:
Revenues $3,559,451 $3,337,449 $4,076,429
Gross profit 567,749 757,678 628,559
Net income 237,906 384,810 371,006
</TABLE>
PDVMR - PDVMR has a 25% interest in Needle, which is accounted for using
the equity method. PDVMR received cash distributions of approximately $3.0
million and $6.5 million in 1999 and 1998, respectively, from Needle. The
carrying value of this investment exceeded PDVMR's equity in the
underlying net assets by approximately $5.7 million and $6.5 million at
December 31, 1999 and 1998, respectively.
Selected financial information for 1999 and 1998 provided by Needle is
shown below:
1999 1998
(Dollars in Thousands)
Summary of financial position:
Current assets $16,723 $17,162
Noncurrent assets 61,459 66,149
Current liabilities 5,228 5,086
Noncurrent liabilities - -
Summary of operating results (full year):
Revenues 61,845 74,150
Gross profit 9,509 23,292
Net earnings 6,729 20,933
8. DISTRIBUTION OF UNO-VEN ASSETS
Since 1989, the Company through various subsidiaries had a 50% interest in
UNO-VEN. On May 1, 1997 pursuant to a Partnership Interest Retirement
Agreement, PDV America and Union Oil Company of California ("UNOCAL")
transferred certain assets and liabilities of UNO-VEN to PDVMR, a
subsidiary of the Company, as a result of the liquidation of the Company's
50% ownership interest in UNO-VEN. The assets included a 153 thousand
barrel per day refinery in Lemont, Illinois, as well as eleven product
distribution terminals and 89 retail sites located in the Midwest. CITGO
operates these facilities and purchases the products produced at the
refinery (Note 3).
In connection with the transaction, the Company received a capital
contribution of $250,000,000 from PDV Holding, the Company's parent. This
contribution was used, in part, to pay off UNO-VEN's senior notes and to
provide working capital.
F-16
<PAGE>
The transaction, for accounting purposes, has been treated as a purchase
and, accordingly, the allocation of fair values to the underlying assets
and liabilities acquired is based upon management's estimates and
appraisals. Pro forma results of operations for this acquisition were not
material.
The allocation of the Company's basis in the partnership and the
acquisition cost was as follows:
(000s Omitted)
Accounts receivable $ 26,300
Inventory 72,200
Property, plant and equipment 576,800
Investment in The Needle Coker Company 28,800
Other assets 35,300
Working capital facility with bank (13,000)
Other current liabilities (257,600)
Long-term debt (154,900)
Other noncurrent liabilities (68,700)
---------
PDVMR's equity $ 245,200
=========
Information with respect to UNO-VEN for the four months ended April 30,
1997 is as follows:
1997
Equity in net income $ 450
Distributions received from UNO-VEN 5,194
Summary of operating results:
Revenues $567,500
Gross profit 37,400
Net income 900
9. SHORT-TERM BANK LOANS
As of December 31, 1999, CITGO has established $184 million of
uncommitted, unsecured, short-term borrowing facilities with various
banks. Interest rates on these facilities are determined daily based upon
the Federal funds' interest rates, and maturity options vary up to 30
days. The weighted average interest rates actually incurred in 1999, 1998
and 1997 were 5.5%, 5.8% and 5.9%, respectively. CITGO had $16 million and
$37 million of borrowings outstanding under these facilities at December
31, 1999 and 1998, respectively.
F-17
<PAGE>
10. LONG-TERM DEBT
1999 1998
(000's omitted)
Revolving bank loans - CITGO $ 345,000 $ 165,000
Revolving bank loan - PDVMR 117,000 45,000
Senior Notes $200 million face amount,
due 2006 with interest rate of 7.875% 199,806 199,776
Senior Notes due 2000 and 2003 with
interest rates from 7.75% to 7.875% 748,151 747,723
Private Placement Senior Notes, due 2000
to 2006 with interest rates from 9.03%
to 9.30% 136,688 176,623
Master Shelf Agreement Senior Notes, due
2002 to 2009 with interest rates from
7.17% to 8.94% 260,000 260,000
Tax Exempt Bonds, due 2004 to 2029 with
variable and fixed interest rates 325,370 295,370
Taxable Bonds, due 2026 to 2028 with
variable interest rates 178,000 208,000
Cit-Con bank credit agreement 14,286 21,429
---------- ----------
2,324,301 2,118,921
Current portion of long-term debt (314,078) (47,078)
---------- ----------
$2,010,223 $2,071,843
========== ==========
On April 15, 1999, CITGO issued $25 million of tax-exempt revenue bonds
due 2029. The proceeds were used to redeem $25 million of the taxable Gulf
Coast environmental facilities revenue bonds due 2028.
Revolving Bank Loans (CITGO) - CITGO's credit agreement with various banks
consists of: (i) a $400 million, five-year, revolving bank loan maturing
in May 2003 and (ii) a $150 million, 364 day, revolving bank loan, both of
which are unsecured and have various borrowing maturities and interest
rate options. Interest rates on the revolving bank loans were 7.8% and
7.5% at December 31, 1999 and 1998, respectively.
Revolving Bank Loans (PDVMR) - PDVMR has a revolving credit facility with
a consortium of banks which is committed through April 28, 2002, and
currently allows for borrowings up to $125 million at various interest
rates. Inventories and accounts receivable of PDVMR are pledged as
collateral. The weighted average interest rates at December 31, 1999 and
1998 were 7.58% and 6.50%, respectively.
F-18
<PAGE>
This facility includes a provision for a mandatory amortization of the
commitment amount, as follows:
Remaining
Reduction Commitment
Date Amount Level
April 28, 2000 $25,000,000 $100,000,000
April 28, 2001 $25,000,000 $ 75,000,000
April 28, 2002 $75,000,000 $ -
Shelf Registration - In April 1996, CITGO filed a registration statement
with the Securities and Exchange Commission relating to the shelf
registration of $600 million of debt securities that may be offered and
sold from time to time. In May 1996, the registration became effective and
CITGO sold a tranche of debt securities with an aggregate offering price
of $200 million. On October 28, 1997, CITGO entered into a Selling Agency
Agreement with Salomon Brothers Inc. and Chase Securities Inc. providing
for the sale of up to an additional $235 million in aggregate principal
amount of notes in tranches from time to time by CITGO under the shelf
registration. No amounts were sold under this agreement as of December 31,
1999.
Senior Notes due 2000 and 2003 - In August 1993, the Company issued $1
billion principal amount of Senior Notes (the "Senior Notes") with
interest rates ranging from 7.25 to 7.875% with due dates ranging from
1998 to 2003. Interest on the Senior Notes is payable semi-annually,
commencing February 1, 1994. The Senior Notes represent senior unsecured
indebtedness of the Company, and are structurally subordinated to the
liabilities of the Company's subsidiaries. The Senior Notes are guaranteed
by Propernyn and PDVSA.
Private Placement - At December 31, 1999, CITGO has outstanding
approximately $137 million of privately placed, unsecured Senior Notes.
Principal amounts are payable in annual installments in November and
interest is payable semi-annually in May and November.
Master Shelf Agreement - At December 31, 1999, CITGO has outstanding $260
million of privately placed senior notes under an unsecured Master Shelf
Agreement with a insurance company. The notes have various fixed interest
rates and maturities.
Tax-Exempt Bonds - Through state entities, CITGO has issued $74.8 million
of industrial development bonds for certain Lake Charles port facilities
and pollution control equipment and $231 million of environmental revenue
bonds to finance a portion of the Company's environmental facilities at
its Lake Charles and Corpus Christi refineries and at the LYONDELL-CITGO
refinery. Additional credit support for these bonds is provided through
letters of credit. The bonds bear interest at various floating rates which
ranged from 4.5% to 6.0% at December 31, 1999, and 4.1% to 6.0% at
December 31, 1998.
PDVMR has issued variable rate pollution control bonds, with interest
currently paid monthly. The bonds have one payment at maturity in the year
2008 to retire the principal, and principal and interest payments are
guaranteed by a $20.3 million letter of credit.
Taxable Bonds - Through state entities, CITGO has issued and currently
outstanding $178 million of taxable environmental revenue bonds to finance
a portion of CITGO's environmental facilities at its Lake Charles refinery
and at the LYONDELL-CITGO refinery. Such bonds are secured by letters of
credit and have floating interest rates (6.1% at December 31, 1999 and
5.3% at December 31, 1998). At the option of CITGO and upon the occurrence
of certain specified conditions, all or any portion of such taxable bonds
may be converted to tax-exempt bonds. As of December 31, 1999, $17 million
of originally issued taxable bonds had been converted to tax-exempt bonds.
F-19
<PAGE>
Cit-Con Bank Credit Agreement - The Cit-Con bank credit agreement consists
of a term loan collateralized by throughput agreements of the owner
companies. The loan contains various interest rate options (weighted
average effective rates of 7.5% and 6.7% at December 31, 1999 and 1998,
respectively), and requires quarterly principal payments through December
2001.
Covenants - The various agreements above contain certain covenants that,
depending upon the level of capitalization and earnings of the Companies,
could impose limitations on the ability of the Companies to pay dividends,
incur additional debt, place liens on property, and sell fixed assets. The
Companies were in compliance with the debt covenants at December 31, 1999.
Future maturities of long-term debt as of December 31, 1999 are:
2000-$314.1 million; 2001-$72.1 million; 2002-$111.4 million; 2003-$904.6
million; 2004-$47.2 million; and $874.9 million thereafter.
Interest Rate Swap Agreements - CITGO has entered into the following
interest rate swap agreements to reduce the impact of interest rate
changes on its variable interest rate debt:
CITGO'S interest rate swap agreements:
Notional Principal Amount
Expiration Fixed Rate 1999 1998
Variable Rate Index Date Paid (000s Omitted)
One-month LIBOR May 2000 6.28% $ 25,000 $ 25,000
J.J. Kenny May 2000 4.72 25,000 25,000
J.J. Kenny February 2005 5.30 12,000 12,000
J.J. Kenny February 2005 5.27 15,000 15,000
J.J. Kenny February 2005 5.49 15,000 15,000
-------- --------
$ 92,000 $ 92,000
======== ========
Interest expense includes $1.5 million, $1.0 million and $0.8 million in
1999, 1998 and 1997, respectively, related to interest paid on these
agreements.
11. EMPLOYEE BENEFIT PLANS
Employee Savings - CITGO sponsors three qualified defined contribution
retirement and savings plans covering substantially all eligible salaried
and hourly employees. Participants make voluntary contributions to the
plans and CITGO makes contributions, including matching of employee
contributions, based on plan provisions. CITGO expensed $18 million, $19
million and $19 million to operations related to its contributions to
these plans in 1999, 1998 and 1997, respectively.
Pension Benefits - CITGO sponsors three qualified noncontributory defined
benefit pension plans, two of which cover eligible hourly employees and
one of which covers eligible salaried employees. CITGO also sponsors three
nonqualified defined benefit plans for certain eligible employees. The
qualified plans' assets include corporate securities, a fixed income
mutual fund, two collective funds and a short-term investment fund. The
nonqualified plans are not funded.
CITGO's policy is to fund the qualified pension plans in accordance with
applicable laws and regulations and not to exceed the tax deductible
limits. The nonqualified plans are funded as necessary to pay retiree
benefits. The plan benefits for each of the qualified pension plans are
primarily based on an employee's years of plan service and compensation as
defined by each plan.
Postretirement Benefits Other Than Pensions - In addition to pension
benefits, the Companies also provide certain health care and life
insurance benefits for eligible salaried and hourly employees at
F-20
<PAGE>
retirement. These benefits, are subject to deductibles, copayment
provisions and other limitations and are primarily funded on a
pay-as-you-go basis. The Companies reserve the right to change or to
terminate the benefits at any time.
The following sets forth the changes in benefit obligations and plan
assets for the pension and postretirement plans for the years ended
December 31, 1999 and 1998 and the funded status of such plans reconciled
with amounts reported in the Companies' consolidated balance sheets:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
------------------------- ----------------------------
1999 1998 1999 1998
(000s Omitted) (000s Omitted)
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation, beginning of year $ 270,382 $ 233,486 $ 195,928 $ 180,406
Service cost 19,554 17,742 6,922 6,610
Interest cost 17,899 16,058 13,040 12,770
Actuarial (gain) loss (39,996) 11,958 (19,540) 1,631
Benefits paid (9,136) (8,862) ` (7,318) (5,489)
--------- --------- --------- ---------
Benefit obligation, end of year 258,703 270,382 189,032 195,928
--------- --------- --------- ---------
Change in plan assets:
Fair value of plan assets, beginning of year 254,648 221,261 939 889
Actual return on plan assets 28,644 38,139 52 50
Employer contribution 1,226 4,110 7,318 5,489
Benefits paid (9,136) (8,862) (7,318) (5,489)
--------- --------- --------- ---------
Fair value of plan assets, end of year 275,382 254,648 991 939
--------- --------- --------- ---------
Funded status 16,679 (15,734) (188,041) (194,989)
Unrecognized net actuarial gain (85,606) (41,146) (31,431) (11,896)
Unrecognized prior service cost 107 147 - -
Net gain at date of adoption (1,012) (1,280) - -
--------- --------- --------- ---------
Net amount recognized $ (69,832) $ (58,013) $(219,472) $(206,885)
========= ========= ========= =========
Amounts recognized in the Company's
consolidated balance sheets consist of:
Accrued benefit liability $ (76,303) $ (61,991) $(219,472) $(206,885)
Intangible asset 1,245 3,978 - -
Accumulated other comprehensive income 5,226 - - -
--------- --------- --------- ---------
Net amount recognized $ (69,832) $ (58,013) $(219,472) $(206,885)
========= ========= ========= =========
Pension Benefits Other Benefits
-------------------------- ----------------------------
1999 1998 1999 1998
Weighted-average assumptions as of
December 31:
Discount rate 7.75% 6.75% 7.75% 6.75%
Expected return on plan assets 9.00% 9.00% 6.00% 6.00%
Rate of compensation increase 5.00% 5.00% - -
</TABLE>
F-21
<PAGE>
For measurement purposes, a 7.0% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1999. The rate was
assumed to decrease gradually to 5.5% for 2002 and remain at that level
thereafter.
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
------------------------------------ ------------------------------------
1999 1998 1997 1999 1998 1997
(000s Omitted) (000s Omitted)
<S> <C> <C> <C> <C> <C> <C>
Components of net periodic benefit
cost:
Service cost $ 19,554 $ 17,742 $ 15,759 $ 6,922 $ 6,610 $ 6,786
Interest cost 17,899 16,058 14,246 13,040 12,770 12,359
Expected return on plan assets (22,531) (19,660) (15,453) (57) (53) (47)
Amortization of prior service cost 40 40 40 - - -
Amortization of net gain at date
of adoption (268) (268) (268) - - -
Recognized net actuarial gain (1,649) (1,625) (1,228) - (8,823) (27,581)
--------- -------- -------- -------- -------- --------
Net periodic benefit cost (credit) $ 13,045 $ 12,287 $ 13,096 $ 19,905 $ 10,504 $ (8,483)
========= ======== ======== ======== ======== ========
</TABLE>
Actuarial gains (or losses) related to the postretirement benefit
obligation are recognized as a component of net postretirement benefit
cost by the amount the beginning of year unrecognized net gain (or loss)
exceeds 7.5% of the accumulated postretirement benefit obligation.
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for the pension plan with accumulated benefit
obligations in excess of plan assets were $23.4 million, $22.8 million and
$0, respectively, as of December 31, 1999 and $18.2 million, $17.5 million
and $0, respectively, as of December 31, 1998.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A one-percentage point change
in assumed health care cost trend rates would have the following effects:
1-Percentage- 1-Percentage-
Point Increase Point Decrease
Increase (decrease) in total of service
and interest cost components $ 4,252,000 $ (3,505,000)
Increase (decrease) in postretirement
benefit obligation 34,215,000 (28,971,000)
Employee Separation Programs - During 1997, CITGO's senior management
implemented a Transformation Program which resulted in certain personnel
reductions (the "Separation Programs"). CITGO expensed approximately $7
million, $8 million and $22 million for the years ended December 31, 1999,
1998 and 1997, respectively, relating to the Separation Programs.
In accordance with the transfer of UNO-VEN's assets to PDVMR (Note 8), on
May 1, 1997, PDVMR assumed the responsibility for UNO-VEN's pension plans,
which include both a qualified and a nonqualified plan which were frozen
at their current levels on April 30, 1997. The plans cover former UNO-VEN
employees who were participants in the plans as of April 30, 1997. At
December 31, 1999 and 1998, plan assets consisted of equity securities,
bonds and cash.
F-22
<PAGE>
The following sets forth the changes in benefit obligations and plan
assets for the years ended December 31, 1999 and 1998 and the funded
status of the plans reconciled with amounts reported in the balance
sheets:
Dollars in
Thousands
1999 1998
Change in benefit obligation:
Benefit obligation, beginning of year $ 64,771 $61,018
Interest cost 4,298 4,348
Actuarial (gain) loss (10,353) 5,735
Benefits paid (8,329) (6,330)
-------- -------
Benefit obligation, end of year 50,387 64,771
-------- -------
Change in plan assets:
Fair value of plan assets, beginning of year 68,057 65,792
Actual return on plan assets 10,054 8,148
Employer contribution - 447
Benefits paid (8,329) (6,330)
-------- -------
Fair value of plan assets, end of year 69,782 68,057
-------- -------
Funded status 19,395 3,286
Unrecognized net actuarial (gain) loss (11,448) 2,997
-------- -------
Prepaid benefit cost $ 7,947 $ 6,283
======== =======
1999 1998
Weighted-average assumptions as of December 31:
Discount rate 7.75% 6.75%
Expected return on plan assets 9.50% 9.50%
1999 1998
Components of net periodic benefit credit:
Interest cost $ 4,298 $ 4,348
Expected return on plan assets (5,996) (5,482)
Recognized net actuarial loss 34 215
-------- -------
Net periodic benefit credit $ (1,664) $ (919)
======== =======
The projected benefit obligation of the nonqualified plan (which equals
the accumulated benefit obligation for this plan) was $380,250 as of
December 31, 1999 and $423,802 as of December 31, 1998. The plan is
unfunded.
F-23
<PAGE>
12. INCOME TAXES
The provisions for income taxes are comprised of the following:
1999 1998 1997
(000s Omitted)
Current:
Federal $ (15,910) $ 41,085 $ 24,369
State 674 5,896 (346)
---------- ----------- ----------
(15,236) 46,981 24,023
Deferred 73,466 84,004 82,145
---------- ----------- ----------
$ 58,230 $ 130,985 $ 106,168
========== =========== ==========
The Federal statutory tax rate differs from the effective rate due to the
following:
1999 1998 1997
Federal statutory tax rate 35.0% 35.0% 35.0%
State taxes, net of Federal benefit 2.6 1.7 2.7
Dividend exclusions (4.0) (2.0) (2.3)
Tax settlement (5.7) - (4.9)
Other 1.1 1.5 1.2
----- ----- -----
Effective tax rate 29.0% 36.2% 31.7%
===== ===== =====
The effective tax rates for 1999 and 1997 were unusually low due primarily
to the favorable resolution in each of these years with the Internal
Revenue Service of significant tax issues related to environmental
expenditures.
F-24
<PAGE>
Deferred income taxes reflect the net tax effects of: (i) temporary
differences between the financial and tax bases of assets and liabilities,
and (ii) loss and tax credit carryforwards. The tax effects of significant
items comprising the net deferred tax liability of the Companies as of
December 31, 1999 and 1998, are as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------
1999 1998
(000s Omitted)
<S> <C> <C>
Deferred tax liabilities:
Property, plant and equipment $ 648,298 $ 625,204
Inventories (including in 1998,
the effect of adjustment to market) 106,457 21,091
Investments in affiliates 135,279 120,480
Other 70,985 63,641
---------- ----------
961,019 830,416
---------- ----------
Deferred tax assets:
Postretirement benefit obligations 77,371 74,331
Marketing and promotional accruals 9,271 12,773
Employee benefit accruals 38,893 34,029
Alternative minimum tax credit carryforward 44,278 45,678
Net operating loss carryforward 58,352 -
Other 115,925 7,589
---------- ----------
344,090 264,400
---------- ----------
Net deferred tax liability (of which $0
and $55,447 is included in prepaid
expenses and other at December 31, 1999
and 1998, respectively) $ 616,929 $ 566,016
========== ==========
</TABLE>
At December 31, 1998, the Companies had capital loss carryforwards of $6.7
million. At December 31, 1998, a valuation allowance of $1.0 million was
established related to that portion of the carryforwards for which it was
considered more likely than not that the related tax benefits would not be
realized before expiration.
During 1999, the Companies filed a claim with the IRS to reclassify
certain losses from capital to ordinary. The Companies were successful and
were able to utilize all capital loss carryforwards in their 1998 tax
return. Therefore, at December 31, 1999, no capital loss carryforwards
exist.
At December 31, 1999, the Companies had a net operating loss carryforward
of $164.6 million, which will expire in 2019.
The Companies alternative minimum tax credit carryforwards are available
to offset regular Federal income taxes in future years without expiration,
subject to certain alternative minimum tax limitations.
On April 26, 1999, the Companies filed a claim with the Internal Revenue
Service for foreign tax credits for Venezuelan income taxes withheld on
interest payments from PDVSA to PDV America, Inc. for tax years 1993
through 1995. The total foreign tax credits claimed for these years is
approximately $9.8 million. The field auditor has allowed the claim in his
Revenue Agents Report. However, due to other unagreed to issues, the case
has been forwarded to IRS Appeals and to date is still in Appeals.
Therefore, the refunds have not been received, but the Companies fully
believe that the refunds will be forthcoming. In addition, the Companies
filed a claim for similar foreign tax credits for the 1996 and 1997 tax
years. The total foreign tax credits for these years is approximately $8.1
million. The audit for these years is currently in process, but the
Companies believe that the claim will be allowed in full and the refunds
will be forthcoming.
F-25
<PAGE>
13. COMMITMENTS AND CONTINGENCIES
Litigation and Injury Claims - Various lawsuits and claims arising in the
ordinary course of business are pending against the Companies. The
Companies record accruals for potential losses when, in management's
opinion, such losses are probable and reasonably estimable. If known
lawsuits and claims were to be determined in a manner adverse to the
Companies, and in amounts greater than the accruals of the Companies, then
such determinations could have a material adverse effect on the results of
operations of the Companies in a given reporting period. However, in
management's opinion, the ultimate resolution of these lawsuits and claims
will not exceed, by a material amount, the amount of the accruals and the
insurance coverage available to the Companies. This opinion is based upon
management's and counsel's current assessment of these lawsuits and
claims. The most significant lawsuits and claims are discussed below.
Litigation is pending in federal court in Lake Charles, Louisiana, against
CITGO by a number of current and former Lake Charles refinery employees
and applicants asserting claims of racial discrimination in connection
with CITGO's employment practices. The first trial in this case, which
involved two plaintiffs, began in October 1999 and resulted in verdicts
for CITGO. The Court granted CITGO's motion for summary judgment with
respect to another group of claims; an appeal of this ruling is expected.
Trials of the remaining cases are currently stayed.
The case brought in the United States District Court for the Northern
District of Illinois by the Oil Chemical & Atomic Workers, Local 7-517
against UNO-VEN, CITGO, PDVSA, PDV America, and UNOCAL pursuant to Section
301 of the Labor Management Relations Act ("LMRA") resulted in the court's
ruling in favor of all defendants on Motions for Summary Judgment in June,
1998; this ruling was affirmed on appeal and the case is now terminated.
In the case of Francois Oil Company, Inc. versus Stop-N'-Go of Madison,
Inc., et al, filed in federal district court in Wisconsin, Stop-N-Go, a
former UNO-VEN marketer, sued UNO-VEN for $1 million, alleging that
UNO-VEN had fraudulently induced it to breach a supply contract with
Francois Oil. UNO-VEN's motion for summary judgment was granted in
September, 1998; this ruling was affirmed on appeal, terminating this
case.
Four former UNO-VEN marketers have filed a class action complaint against
UNO-VEN alleging improper termination of the UNO-VEN Marketer Sales
Agreement under the Petroleum Marketing Practices Act in connection with
PDVMR's 1997 acquisition of Unocal's interest in UNO-VEN. The lawsuit is
pending in U.S. District Court in Wisconsin and is in the discovery phase.
PDVMR and the Company, jointly and severally, have agreed to indemnify
UNO-VEN and certain other related entities against certain liabilities and
claims, including the preceding two matters.
In May 1997, an explosion and fire occurred at CITGO's Corpus Christi
refinery. No serious personal injuries were reported. CITGO received
approximately 7,500 individual claims for personal injury and property
damage related to the above noted incident. Approximately 1,300 of these
claims have been resolved for amounts which individually and collectively
were not material. There are presently seventeen lawsuits filed on behalf
of approximately 9,000 individuals arising out of this incident in federal
and state courts in Corpus Christi alleging property damages, personal
injury and punitive damages. A trial of one of the federal court lawsuits
in October 1998 involving ten bellwether plaintiffs, out of approximately
400 plaintiffs, resulted in a verdict for CITGO. The remaining plaintiffs
in this case have agreed to settle for an immaterial amount.
A class action lawsuit is pending in Corpus Christi, Texas state court
against CITGO and other operators and owners of nearby industrial
facilities which claims damages for reduced value of residential
properties located in the vicinity of the industrial facilities as a
result of air, soil and
F-26
<PAGE>
groundwater contamination. CITGO has contracted to purchase all of the 275
properties included in the lawsuit which are in an area adjacent to
CITGO's Corpus Christi refinery and settle the property damage claims
relating to these properties. Related to this purchase, $15.7 million was
expensed in 1997. The trial judge recently ruled, over CITGO's objections,
that a settlement agreement CITGO entered into in September 1997 and
subsequently withdrew from, which provided for settlement of the remaining
property damage claims for $5 million, is enforceable. CITGO believes this
ruling is erroneous and will appeal. The trial against CITGO of these
remaining claims will be postponed indefinitely. Two related personal
injury and wrongful death lawsuits were filed against the same defendants
in 1996, one of which is scheduled for trial in 2000. A trial date for the
other case has not been set.
CITGO is among defendants to lawsuits in California, North Carolina and
New York alleging contamination of water supplies by methyl tertiary butyl
ether ("MTBE"), a component of gasoline. The action in California was
filed in November 1998 by the South Tahoe Public Utility District and
CITGO was added as a defendant in February 1999. The North Carolina case,
filed in January 1999, and the New York case, filed in January 2000, are
putative class actions on behalf of owners of water wells and other
drinking water supplies in the states. All of these actions allege that
MTBE poses public health risks. These matters are in early stages of
discovery. CITGO has denied all of the allegations and is pursuing its
defenses.
Environmental Compliance and Remediation - The Companies are subject to
various Federal, state and local environmental laws and regulations which
may require the Companies to take action to correct or improve the effects
on the environment of prior disposal or release of petroleum substances by
the Companies or other parties. Management believes the Companies are in
compliance with these laws and regulations in all material respects.
Maintaining compliance with environmental laws and regulations in the
future could require significant capital expenditures and additional
operating costs.
In 1992, CITGO reached an agreement with a state agency to cease usage of
certain surface impoundments at CITGO's Lake Charles refinery by 1994. A
mutually acceptable closure plan was filed with the state in 1993. CITGO
and a former owner are participating in the closure and sharing the
related costs based on estimated contributions of waste and ownership
periods. The remediation commenced in December 1993. In 1997, CITGO
presented a proposal to a state agency revising the 1993 closure plan. In
1998, the Company amended its 1997 proposal as requested by the state
agency. A ruling on the proposal, as amended, is expected in 2000 with
final closure to begin in 2002.
In 1992, an agreement was reached between CITGO and a former owner
concerning a number of environmental issues. The agreement consisted, in
part, of payments to CITGO totaling $46 million. The former owner will
continue to share the costs of certain specific environmental remediation
and certain tort liability actions based on ownership periods and specific
terms of the agreement.
The Texas Natural Resource Conservation Commission ("TNRCC") conducted an
environmental compliance review at the Corpus Christi Refinery in the
first and second quarters of 1998. In January 1999, the TNRCC issued to
CITGO a Notice of Violation ("NOV") arising from this review and in
October 1999 proposed fines of approximately $1.6 million related to the
NOV. Most of the alleged violations refer to recordkeeping and reporting
issues, failure to keep proper records, failure to meet required emissions
levels, and failure to properly monitor emissions. TNRCC issued to CITGO
another NOV in December 1999 based on its 1999 audits which cites items
similar to items cited earlier and the agency has tentatively suggested
that the two audits should be combined for resolution. CITGO intends to
vigorously protest the alleged violations and proposed fines.
In June 1999, CITGO and numerous other industrial companies received
notice from the U.S. Environmental Protection Agency ("EPA") that the EPA
believes these companies have contributed to contamination in the
Calcasieu Estuary, in the proximity of Lakes Charles, Calcasieu Parish,
Louisiana
F-27
<PAGE>
and are Potentially Responsible Parties ("PRPs") under the Comprehensive
Environmental Response, Compensation, and Liability Act ("CERCLA"). The
EPA made a demand for payment of its past investigation costs from CITGO
and other PRPs and advised it intends to conduct a Remedial
Investigation/Feasibility Study ("RI/FS") under the CERCLA authority.
CITGO and other PRPs may be potentially responsible for the costs of the
RI/FS. CITGO disagrees with the EPA's allegations and intends to contest
this matter.
In October 1999, the EPA issued a NOV to CITGO for violations of federal
regulations regarding reformulated gasoline found during a May 1998
inspection at CITGO's Braintree, Massachusetts terminal and recommended a
penalty of $218,500. CITGO intends to vigorously contest the proposed
fines and allegations.
Based on currently available information, including the continuing
participation of the former owner in remediation actions, management
believes its accruals for potential environmental liabilities are
adequate. Conditions which would require additional expenditures may exist
for various Company sites including, but not limited to, the Company's
operating refinery complexes, closed refineries, service station sites and
crude oil and petroleum product storage terminals. The amount of such
future expenditures, if any, is indeterminable.
Supply Agreements - CITGO purchases the crude oil processed at its
refineries and also purchases refined products to supplement the
production from its refineries to meet market demands and resolve
logistical issues. In addition to supply agreements with various
affiliates (Note 3), CITGO has various other crude oil, refined product
and feedstock purchase agreements with unaffiliated entities with terms
ranging from monthly to annual renewal. CITGO believes these sources of
supply are reliable and adequate for its current requirements.
Throughput Agreements - CITGO has throughput agreements with certain
pipeline affiliates (Note 7). These throughput agreements may be used to
secure obligations of the pipeline affiliates. Under these agreements,
CITGO may be required to provide its pipeline affiliates with additional
funds through advances against future charges for the shipping of
petroleum products. CITGO currently ships on these pipelines and has not
been required to advance funds in the past. At December 31, 1999, CITGO
has no fixed and determinable, unconditional purchase obligations under
these agreements.
Commodity Derivative Activity - The Companies' commodity derivatives are
generally entered into through major brokerage houses and traded on
national exchanges and can be settled in cash or through delivery of the
commodity. Such contracts generally qualify for hedge accounting and
correlate to market price movements of crude oil and refined products.
Resulting gains and losses, therefore, will generally be offset by gains
and losses on the Companies' hedged inventory or future purchases and
sales. The Companies' derivative commodity activity is closely monitored
by management and contract periods are generally less than 30 days.
Unrealized and deferred gains and losses on these contracts at December
31, 1999 and 1998 and the effects of realized gains and losses on cost of
sales and pretax earnings for 1999, 1998 and 1997 were not material. At
times during 1998, the Companies entered into commodity derivatives
activities that were not related to the hedging program discussed above.
This activity and the resulting gains and losses were not material in
1998. There was no nonhedging activity in 1999 or 1997.
Other Credit and Off-Balance-Sheet Risk Information as of December 31,
1999 - CITGO has guaranteed approximately $14 million of debt of certain
of its marketers and an affiliate. Such debt is substantially
collateralized by assets of these entities. CITGO has also guaranteed
approximately $101 million of debt of certain affiliates, including $50
million related to HOVENSA (Note 3) and $11 million related to NISCO (Note
7). CITGO and PDVMR have outstanding letters of credit totaling
approximately $566 million which includes $525 million related to CITGO's
tax-exempt and taxable revenue bonds and $20 million related to PDVMR's
pollution control bonds (Note 10). CITGO has
F-28
<PAGE>
also acquired surety bonds totaling $40 million primarily due to
requirements of various government entities. CITGO does not expect
liabilities to be incurred related to such guarantees, letters of credit
or surety bonds.
Neither CITGO nor the counterparties are required to collateralize their
obligations under interest rate swaps or caps or over-the-counter
derivative commodity agreements. CITGO is exposed to credit loss in the
event of nonperformance by the counterparties to these agreements, but has
no off-balance-sheet risk of accounting loss for the notional amounts.
CITGO does not anticipate nonperformance by the counterparties, which
consist primarily of major financial institutions.
Management considers the market risk to the Companies related to its
commodity and interest rate derivatives to be insignificant during the
periods presented.
14. LEASES
CITGO leases certain of its Corpus Christi refinery facilities under a
capital lease. The basic term of the lease expires on January 1, 2004;
however, CITGO may renew the lease until January 31, 2011, the date of its
option to purchase the facilities at a nominal amount. Capitalized costs
included in property, plant and equipment related to the leased assets
were approximately $209 million at December 31, 1999 and 1998. Accumulated
amortization related to the leased assets was approximately $110 million
and $102 million at December 31, 1999 and 1998, respectively. Amortization
is included in depreciation expense.
F-29
<PAGE>
The Companies also have various noncancelable operating leases, primarily
for product storage facilities, office space, computer equipment and
vehicles. Rent expense on all operating leases totaled $35 million, $34
million and $39 million in 1999, 1998 and 1997, respectively. Future
minimum lease payments for the capital lease and noncancelable operating
leases are as follows:
<TABLE>
<CAPTION>
Capital Operating
Lease Leases Total
Year (000s Omitted)
<S> <C> <C> <C>
2000 $ 27,375 $ 34,586 $ 61,961
2001 27,375 30,833 58,208
2002 27,375 25,311 52,686
2003 27,375 18,665 46,040
2004 5,000 15,238 20,238
Thereafter 31,000 26,077 57,077
-------- --------- ----------
Total minimum lease payments 145,500 $ 150,710 $ 296,210
-------- ========= =========
Amount representing interest (43,574)
--------
Present value of minimum lease payments 101,926
Current portion 16,356
--------
$ 85,570
========
</TABLE>
15. FAIR VALUE INFORMATION
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
Disclosures About Fair Value of Financial Instruments. The estimated fair
value amounts have been determined by the Companies, using available
market information and appropriate valuation methodologies. However,
considerable judgment is necessarily required in interpreting market data
to develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts that the
Companies could realize in a current market exchange. The use of different
market assumptions and/or estimation methodologies may have a material
effect on the estimated fair value amounts.
The carrying amounts of cash equivalents, restricted cash and
variable-rate debt approximate fair value. The carrying amounts and
estimated fair values of the Companies' other financial instruments are as
follows:
<TABLE>
<CAPTION>
1999 1998
------------------------------ ------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
(000s Omitted) (000s Omitted)
<S> <C> <C> <C> <C>
Liabilities:
Short-term bank loans $16,000 $16,000 $37,000 $37,000
Long-term debt 2,324,301 2,264,954 2,118,921 2,087,675
Derivative and off-balance-
sheet financial instruments -
unrealized losses:
Interest rate swap agreements - (1,281) - (2,983)
Guarantees of debt - (898) - (601)
Letters of credit - (4,443) - (3,015)
Surety bonds - (159) - (147)
</TABLE>
F-30
<PAGE>
Short-Term Bank Loans and Long-Term Debt - The fair value of short-term
bank loans and long-term debt is based on interest rates that are
currently available to the Companies for issuance of debt with similar
terms and remaining maturities, except for the Company's $750 million
principle amount senior notes which were based upon quoted market prices.
Interest Rate Swap and Cap Agreements - The fair value of these agreements
is based on the estimated amount that the Company would receive or pay to
terminate the agreements at the reporting date, taking into account
current interest rates and the current creditworthiness of the
counterparties.
Guarantees, Letters of Credit and Surety Bonds - The estimated fair value
of contingent guarantees of third-party debt, letters of credit and surety
bonds is based on fees currently charged for similar one-year agreements
or on the estimated cost to terminate them or otherwise settle the
obligations with the counterparties at the reporting dates.
The fair value estimates presented herein are based on pertinent
information available to management as of the reporting dates. Although
management is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since that date, and
current estimates of fair value may differ significantly from the amounts
presented herein.
16. QUARTERLY RESULTS OF OPERATIONS - UNAUDITED
The following is a summary of the quarterly results of operations for the
years ended December 31, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
1999 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
<S> <C> <C> <C> <C>
Sales $ 2,259,110 $ 3,160,048 $ 3,673,334 $ 4,239,340
============ ============ ============ ============
Cost of sales and operating expenses $ 2,055,803 $ 3,032,147 $ 3,542,097 $ 4,177,180
============ ============ ============ ============
Net income (loss) $ 78,313 $ 29,951 $ 40,451 $ (6,530)
============ ============ ============ =============
1998 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
Sales $ 2,748,946 $ 2,944,287 $ 2,731,898 $ 2,541,898
============ ============ ============ ============
Cost of sales and operating expenses $ 2,536,189 $ 2,752,531 $ 2,523,825 $ 2,495,404
============ ============ ============ ============
Net income (loss) $ 95,338 $ 70,620 $ 85,369 $ (20,609)
============ ============ ============ =============
</TABLE>
******
F-31
<PAGE>
Commission File Number 001-12138
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
EXHIBITS
FILED WITH
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
--------------------
PDV America, Inc.
(Exact name of registrant as specified in its charter)
<PAGE>
INDEX TO EXHIBITS
Sequential Page
Exhibits Number
- -------- ------
(1) Financial Statements:
Independent Auditors' Report............................................F-1
Consolidated Balance Sheets at December 31, 1999 and 1998...............F-2
Consolidated Statements of Income and Comprehensive Income for
each of the years ended December 31, 1999,
1998 and 1997..................................................F-3
Consolidated Statements of Shareholder's Equity for each of
the years ended December 31, 1999, 1998 and 1997...............F-4
Consolidated Statements of Cash Flows for each of
the years ended December 31, 1999, 1998 and 1997...............F-5
Notes to the Consolidated Financial Statements..........................F-7
(2) None
(3) Exhibits:
The exhibit Index in part c., below, lists the
exhibits that are filed as part of, or incorporated
by reference into, this report.
(b) Reports on Form 8-K
None
i
<PAGE>
c. Exhibits
*3.1 Certificate of Incorporation, Certificate of Amendment of
Certificate of Incorporation and By-laws of PDV America
*4.1 Indenture, dated as of August 1, 1993, among PDV
America, Propernyn, PDVSA and Citibank, N.A., as trustee,
relating to PDV America's 7-1/4% Senior Notes Due 1998, 7-3/4%
Senior Notes Due 2000 and 7-7/8% Senior Notes Due 2003
*4.2 Form of Senior Note (included in Exhibit 4.1)
*10.1 Crude Supply Agreement, dated as of September 30, 1986,
between CITGO Petroleum Corporation and Petroleos de Venezuela,
S.A.
*10.2 Supplemental Crude Supply Agreement, dated as of September 30,
1986, between CITGO Petroleum Corporation and Petroleos de
Venezuela, S.A.
*10.3 Crude Oil and Feedstock Supply Agreement, dated as of March 31,
1987, between Champlin Refining Company and Petroleos de
Venezuela, S.A.
*10.4 Supplemental Crude Oil and Feedstock Supply Agreement, dated as
of March 31, 1987, between Champlin Refining Company and
Petroleos de Venezuela, S.A.
*10.5 Contract for the Purchase/Sale of Boscan Crude Oil, dated as of
June 2, 1994, between Tradecal, S.A. and CITGO Asphalt Refining
Company
*10.6 Restated Contract for the Purchase/Sale of Heavy/Extra Heavy
Crude Oil, dated December 28, 1990, among Maraven, S.A.,
Lagoven, S.A., and Seaview Oil Company
*10.7 Sublease Agreement, dated as of March 31, 1987, between
Champlin Petroleum Company, as Sublessor, and Champlin Refining
Company, as Sublessee
*10.8 Operating Agreement, dated as of May 1, 1984, among Cit-Con Oil
Corporation, CITGO Petroleum Corporation and Conoco, Inc.
*10.9 Amended and Restated Limited Liability Company Regulations of
LYONDELL-CITGO Refining Company, Ltd. dated July 1, 1993
*10.10 Contribution Agreement among Lyondell Petrochemical Company,
LYONDELL-CITGO Refining Company, Ltd. and Petroleos de
Venezuela, S.A.
- -----------------------
* Previously filed in connection with the Registrant's Registration Statement
on Form F-1, Registration No. 33-63742, originally filed with the
Commission on June 2, 1993.
ii
<PAGE>
*10.11 Crude Oil Supply Agreement, dated as of May 5, 1993, between
LYONDELL-CITGO Refining Company, Ltd. and Lagoven, S.A.
*10.12 Supplemental Supply Agreement, dated as of May 5, 1993, between
LYONDELL-CITGO Refining Company, Ltd. and Petroleos de
Venezuela, S.A.
*10.13 The UNO-VEN Company Partnership Agreement, dated as of December
4, 1989, between Midwest 76, Inc. and VPHI Midwest, Inc.
*10.14 Supply Agreement, dated as of December 1, 1989, between The
UNO-VEN Company and Petroleos de Venezuela, S.A.
*10.15 Supplemental Supply Agreement, dated as of December 1, 1989,
between The UNO-VEN Company and Petroleos de Venezuela, S.A.
*10.16 Tax Allocation Agreement, dated as of June 24, 1993, among PDV
America, Inc., VPHI Midwest, Inc., CITGO Petroleum Corporation
and PDV USA, Inc., as amended
**10.17 Amendment and Supplement to Supply Agreement, dated as of May
11, 1994, between The UNO-VEN Company and Tradecal, S.A., as
assignee of Petroleos de Venezuela, S.A.
***10.18 $150,000,000 Credit Agreement, dated May 13, 1998 between CITGO
Petroleum Corporation and the Bank of America National Trust
and Savings Association, The Bank of New York, the Royal Bank
of Canada and Other Financial Institutions
***10.19 $400,000,000 Credit Agreement, dated May 13, 1998 between CITGO
Petroleum Corporation and the Bank of America National Trust
and Savings Association, The Bank of New York, the Royal Bank
of Canada and Other Financial Institutions
***10.20 Limited Partnership Agreement of LYONDELL-CITGO Refining LP,
dated December 31, 1998
- -------------------
* Previously filed in connection with the Registrant's Registration Statement
on Form F-1, Registration No. 33-63742, originally filed with the
Commission on June 2, 1993.
** Previously filed in connection with the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1994.
*** Previously filed as an Exhibit to CITGO Petroleum Corporation's ("CITGO")
Form 10-K (File No. 1-14380) and incorporated herein by this reference.
iii
<PAGE>
***10.21 Loan Agreement with PDVSA Finance Ltd. consisting of a
Promissory Note in the amount of $130,000,000, dated November
10, 1998
***10.22 Loan Agreement with PDVSA Finance Ltd. consisting of a
Promissory Note in the amount of $130,000,000, dated November
10, 1998
10.23 Loan agreement with PDVSA Finance Ltd. consisting of a
Promissory Note in the amount of $38,000,000, dated July 2,
1999
12.1 Computation of Ratio of Earnings to Fixed Charges
21.1 List of Subsidiaries of the Registrant
27.1 Financial Data Schedule
- --------------------
* Previously filed in connection with the Registrant's Registration Statement
on Form F-1, Registration No. 33-63742, originally filed with the
Commission on June 2, 1993.
** Previously filed in connection with the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1994.
*** Previously filed as an Exhibit to PDV America's Form 10-K for the fiscal
year ended December 31, 1998.
iv
Exhibit 10.23
PROMISSORY NOTE
US$38 million
July 2, 1999
PDVSA Finance Ltd. ("PDVSA Finance"), for value received,
hereby unconditionally promises to pay to the order of PDV America, Inc., or to
its assigns (the "Lender"), in lawful money of the United States of America, the
principal amount of Thirty Eight Million Dollars (US$38 million) (the "Loan") in
installments as described below. PDVSA Finance further promises to pay interest
on the unpaid principal amount of the Loan at the interest rate and on the dates
described below.
1. General
1.1. General. PDVSA Finance covenants and agrees that, so long
as any amount payable under the Loan remains unpaid it shall observe and perform
each of the covenants and obligations set forth in Article 4 and Article 7 of
the Fiscal and Paying Agency Agreement, (the "Fiscal Agency Agreement"), dated
May 14, 1998, among PDVSA Finance and The Chase Manhattan Bank, as Fiscal Agent,
and Chase Manhattan Bank Luxembourg S.A., as Paying Agent, which Articles are
incorporated by reference in this promissory note as if fully set forth herein,
in accordance with their terms. Capitalized terms used in this promissory note
have the meanings specified in the Fiscal Agency Agreement unless otherwise
defined herein. This promissory note constitutes a Debt Agreement as defined in
the Fiscal Agency Agreement.
2. Definitions
2.1. Definitions. For purposes of this Note, the following
terms shall have the meanings indicated:
"Business Day" means a day that in the city in which Loan
amounts are payable, is not a day on which banking institutions are authorized
or required by law or regulation to close.
"Dollars" or "$" means the lawful currency of the United
States of America.
"Loan" means the loan to PDVSA Finance evidenced hereby.
"Make-Whole Premium" means a premium determined as of the
Business Day prior to the prepayment date for a prepayment being made pursuant
to Section 3.2 of this promissory note, in respect of the outstanding Loan
amount (or the portion thereof) to be prepaid, equal to the amount (but not less
than zero) obtained by subtracting (a) the sum of the unpaid principal amount of
such Loan (or the portion thereof) being prepaid and the amount of interest
thereon accrued to such prepayment date, from (b) the Current Value of the
amount of principal and interest on such Loan (or the portion thereof) being
prepaid that would otherwise have become due on and after the date of such
determination if the Note were not being prepaid (each such amount of principal
or interest being referred to herein as an "Amount Payable"). The "Current
Value" means such Amount Payable discounted (on a monthly basis) to its present
value on the date of determination, in accordance with the following formula:
<PAGE>
Amount Payable
Current Value = --------------
(1 + d/12)n
where "d" is the sum of (i) 50 basis points, plus (ii) the Treasury Yield per
annum expressed as a decimal, and "n" is an exponent (which need not be an
integer) equal to the number of monthly periods and portions thereof (any such
portion of a period to be determined by dividing the number of days in such
portion of such period by the total number of days in such period, both computed
on the basis of twelve 30-day months in a 360-day year) between the date of such
determination and the due date of the Amount Payable. The "Treasury Yield" shall
be determined by reference to the yields for U.S. Treasury Notes as indicated
(currently on page "500" thereof) on the Telerate Screen for actively traded
U.S. Treasury Notes at approximately 10:00 a.m. (New York City time) on the
Business Day next preceding such prepayment date or, if such yields shall not be
reported as of such time or the yields reported as of such time shall not be
ascertainable, by reference to the most recent Federal Reserve Statistical
Release H.15 (519) which has become publicly available at least two Business
Days prior to such prepayment date, and shall be the most recent weekly average
yield on actively traded U.S. Treasury Notes adjusted to a constant maturity
equal to the then remaining weighted average life of the outstanding principal
amount of the Note (the "Remaining Life"), computed by dividing (A) the sum of
all remaining principal payments into (B) the total of the products obtained by
multiplying (1) the amount of each remaining principal payment by (2) the number
of years (calculated to the nearest one-twelfth) which will elapse between the
date as of which such computation is made and the due date of each remaining
principal payment. If the Remaining Life is not equal to the constant maturity
of a U.S. Treasury Note for which a weekly average yield is given, the Treasury
Yield shall be obtained by linear interpolation (calculated to the nearest
one-twelfth of a year) from the weekly average yields of (x) the actively traded
U.S. Treasury Note with the average life closest to and greater than the
Remaining Life and (y) the actively traded U.S. Treasury Note with the average
life closest to and less than the Remaining Life, except that if the Remaining
Life is less than one year, the weekly average yield on actively traded U.S.
Treasury Notes adjusted to a constant maturity of one year shall be used. The
Treasury Yield shall be computed to the fifth decimal place (one-thousandth of a
percentage point) and then rounded to the fourth decimal place (one-hundredth of
a percentage point).
"Next Payment of Scheduled Debt Service" means on any date of
determination for any Debt Agreement, the amount of the first payment of
Scheduled Debt Service in respect of Indebtedness outstanding under such Debt
Agreement that is scheduled to be paid in cash after such date of determination.
For this purpose, amounts scheduled to be paid on the same date shall be treated
as a single payment whether such amounts shall be principal, interest or
otherwise.
"Note" means this promissory note of PDVSA Finance evidencing
the payment obligations of PDVSA Finance in respect of the Loan.
"Payment Date" means each February 15, May 15, August 15 and
November 15 of each year. If a Payment Date falls on any day which is not a
Business Day, such Payment Date will be postponed to the next day which is a
Business Day.
"Taxes" has the meaning assigned to that term in Section 6.1
below.
2
<PAGE>
3. Repayment
3.1. Repayment. (a) PDVSA Finance shall repay the outstanding
principal amount of the Loan commencing on August 15, 2012 in 8 equal quarterly
installments of principal as illustrated in Exhibit A.
(b) In the event of any prepayment pursuant to Section 3.2
hereof, the remaining unpaid installments of principal of the Loan will be
ratably reduced by an aggregate amount equal to the principal amount so being
repaid.
3.2. Optional Prepayment. PDVSA Finance may prepay the Loan,
at any time, in whole or in part, in an integral multiple of $1,000,000 at the
Prepayment Price as provided in this Section 3.2. The Prepayment Price shall be
an amount equal to 100% of the outstanding principal amount to be prepaid
together with accrued and unpaid interest thereon together with an amount equal
to the Make-Whole Premium, if any, calculated as of the Business Day prior to
the prepayment date. PDVSA Finance shall no later than the third Business Day
preceding the date it designates for any prepayment, give the Lender written
notice of the amount to be prepaid on such date. Any notice so given will be
irrevocable.
4. Interest
4.1. Rate. Interest shall be payable in arrears quarterly on
each Payment Date commencing on August 15, 1999 as illustrated in Exhibit A.
Except as otherwise expressly provided in Section 4.2, interest shall accrue on
the outstanding principal amount of the Loan, at a rate per annum equal to
10.395 percent (10.395%).
4.2. Interest on Late Payments. If PDVSA Finance shall fail to
pay when due any installment of principal of or interest on the Note, it shall
pay the Lender on demand interest on the amount in default (after giving effect
to any applicable grace period) from the date such payment became due until
payment in full at the rate of 1% over the applicable per annum interest rate.
5. Payments; Computations
5.1. Making of Payments. Each payment by PDVSA Finance to the
Lender under this Note shall be made in Dollars pursuant to the terms of Section
3.02 of the Fiscal Agency Agreement or, if the Fiscal Agency Agreement shall no
longer be in effect, pursuant to such other instructions as the Lender may give
by prior written notice to PDVSA Finance.
5.2. Computations. Accrued interest on the Loan shall be
calculated on the basis of a 360-day year of twelve 30-day months and shall be
payable quarterly in arrears on each Payment Date.
6. Taxes
6.1. Taxes. All payments by PDVSA Finance hereunder shall be
made free and clear of and without deduction for any and all present or future
taxes, levies, imposts, deductions, charges or withholdings imposed by the
Cayman Islands or Venezuela or any political subdivision or taxing authority
therein (all such taxes, levies, imposts, deductions, charges, withholdings and
liabilities being hereinafter referred to as "Taxes"). If any Taxes shall be
required by law to be deducted from or in respect of any amount payable
hereunder, (i) the amount payable by PDVSA Finance shall be increased as may be
3
<PAGE>
necessary so that after making all required deductions the Lender shall receive
an amount equal to the sum it would have received had no such deductions been
made, (ii) PDVSA Finance shall make such deductions and (iii) PDVSA Finance
shall pay the full amount deducted to the relevant taxing authority in
accordance with applicable law. Within 30 days after the date of any payment of
Taxes by PDVSA Finance in respect of any payment hereunder, PDVSA Finance will
furnish to the Lender the original or a certified copy of a receipt evidencing
payment thereof.
7. Events of Default
7.1. Events of Default. If one or more of the following events
of default (each an "Event of Default") shall occur and be continuing, the
Lender shall be entitled to the remedies set forth in Sections 7.2 and
7.3 hereof.
(a) Default in the payment of all or any part of the principal
on the Loan and when the same shall become due and payable either at maturity,
upon any prepayment, or otherwise; or
(b) Default in the payment of any installments of interest
upon or other amount in respect of the Loan (other than principal) as and when
the same shall become due and payable, and continuance of such default for a
period of 5 days; or
(c) The occurrence of any "Event of Default" set forth in the
Fiscal Agency Agreement; or
(d) A court having jurisdiction in the premises shall enter a
decree or order for relief in respect of PDVSA Finance, PDVSA-P&G or PDVSA in an
involuntary case under any applicable bankruptcy, insolvency or other similar
law now or hereafter in effect, or appointing a receiver, liquidator, assignee,
custodian, sequestrator (or similar official) of PDVSA Finance, PDVSA-P&G or
PDVSA, as appropriate, or for all or any substantial part of its Property or
ordering the winding up or liquidation of its affairs or its dissolution or
reorganization, and in each case such decree or order shall remain unstayed and
in effect for a period of 60 consecutive days; or (ii) PDVSA Finance, PDVSA-P&G
or PDVSA shall commence a voluntary case under any applicable bankruptcy,
insolvency or other similar law now or hereafter in effect, or consent to the
entry of an order for relief in an involuntary case under any such law, or
consent to the appointment or taking possession by a receiver, liquidator,
assignee, custodian, trustee, sequestrator (or similar official) of PDVSA
Finance, PDVSA-P&G or PDVSA, as appropriate, or for all or any substantial part
of its Property, or make any general assignment for the benefit of creditors or
admits its inability to pay its debts as they come due; or
(e) Failure by PDVSA Finance to remedy a breach of any
covenant set forth herein in any material respect (other than those covenants
incorporated by reference in Section 1.1) within 60 days after PDVSA Finance
became aware or should have become aware of such breach; or
(f) It becomes unlawful for PDVSA Finance to perform any of
its obligations under the Fiscal Agency Agreement or the Note; or
(g) At any time, and for 7 consecutive Business Days, the
aggregate amount of cash and Permitted Investments held in, or credited to, the
Liquidity Facility (including Acceptable Letters of Credit held in lieu of cash
or Permitted Investments pursuant to Section 5.03 of the Fiscal Agency
4
<PAGE>
Agreement) is less than an amount, determined at such time, equal to the sum of
Next Payments of Scheduled Debt Service for all Debt Agreements pursuant to
which Indebtedness is outstanding on such date; or
(h) PDVSA Finance (or any entity that has assumed its
obligations thereunder) revokes or terminates the Fiscal Agency Agreement or the
Note or the Fiscal Agency Agreement or the Note ceases to be in full force and
effect other than pursuant to its terms or is repudiated by PDVSA Finance.
7.2. Default Remedies. (a) If any Event of Default shall occur
and be continuing, the Lender may, by notice to PDVSA Finance, declare all
amounts payable hereunder by PDVSA Finance that would otherwise be due after the
date of such declaration to be immediately due and payable, whereupon all such
amounts shall become immediately due and payable, all without diligence,
presentment, demand or payment, protest or notice of any kind, which are
expressly waived by the PDVSA Finance, subject to paragraph (b) below.
(b) The Lender shall be deemed to agree that it shall only be
entitled to receive payment (in respect of the Loan), and shall not ask, demand,
sue for, take or receive from PDVSA Finance, by set-off or in any other manner,
or retain, payment (in whole or in part) of such amounts other than the Lender's
ratable share of amounts, if any, on deposit in the Retention Account
established and maintained with the Fiscal Agent; provided that such agreement
shall automatically cease to have any force and effect upon the occurrence and
during the continuance of any Event of Default of the type referred to in
Section 7.01(a), (c), (d), (g), (h), (i), (k)(ii), (l) or (m) of the Fiscal
Agency Agreement as specified therein. The foregoing shall not limit the right
of any person to enforce the Receivables Documents against any party thereto or
to exercise any right thereunder.
7.3. Rights Not Exclusive. The rights provided for herein are
cumulative and are not exclusive of any other rights, powers, privileges or
remedies provided by law.
8. General
8.1. Choice of Law. This Note shall be governed by and
construed and interpreted in accordance with the law of the State of New York.
8.2. Jurisdiction. PDVSA Finance agrees that any legal suit,
action or proceeding relating to this Note may be brought in the federal courts
of the United States for the Southern District of New York (and the courts of
appeal thereto), and if they cannot or will not hear such an action, then in the
state courts of the County and State of New York (and the courts of appeal
thereto), waives any claim that such proceeding has been brought in an
inconvenient forum and irrevocably submits to and accepts the nonexclusive
jurisdiction of such courts in any such proceeding. PDVSA Finance agrees to
appoint CT Corporation System (the "Authorized Agent"), with an office on the
date hereof at 1633 Broadway, New York, New York 10019, United States, as its
agent to receive on behalf of PDVSA Finance and its property service of copies
of the summons and complaint and any other process which may be served in any
such action or proceeding. The Authorized Agent may be served in any such action
which may be instituted in any such court. PDVSA Finance agrees to take any and
all action, including the filing of any and all documents and instruments that
may be necessary to continue such appointment in full force and effect as
aforesaid. Service of process upon the Authorized Agent and written notice of
such service to PDVSA
5
<PAGE>
Finance (mailed or delivered to PDVSA Finance at its address as set forth
herein) shall be deemed effective service of process upon PDVSA Finance.
8.3. Notices. All notices pursuant to this Note shall be given
in writing and sent by certified or registered mail, postage-prepaid or by
facsimile transmission. All such notices shall be sent to the telecopier number
or address (as the case may be) specified for the intended recipient on the
signature page hereof, or to such other number or address as such recipient may
have last specified by notice to the other party. All such notices shall be
effective upon receipt.
8.4. Assignment. This Note shall be binding upon and inure to
the benefit of the Lender and PDVSA Finance and their respective successors and
assigns; provided, however, that PDVSA Finance may not assign any of its rights
or delegate any of its obligations under this Note without the prior written
consent of the Lender.
(b) The Lender may at any time assign any of its rights (in
whole but not in part) under this Note and shall promptly give written notice
thereof to PDVSA Finance. PDVSA Finance shall, from time to time at the request
of the Lender, execute and deliver such documents as may be necessary to give
full force and effect to any such assignment.
8.5. Enforcement Expenses. PDVSA Finance shall reimburse the
Lender on demand for all reasonable expenses incurred as a consequence of, or in
connection with, any Event of Default or the preservation or enforcement of any
right of the Lender under this Note.
8.6. Waiver of Immunity. To the extent that PDVSA Finance
(including any of its revenues, assets or properties) has or hereafter may
acquire any immunity from jurisdiction of any court, from service or notice,
attachment prior to judgment, attachment in aid of execution of judgment, or any
other legal process for enforcement of judgment in any action or proceeding in
any manner arising out of the Fiscal Agency Agreement or the transactions
contemplated hereby, PDVSA Finance hereby irrevocably agrees not to plead or
claim, and irrevocably waives any such immunity, and any defense based on such
immunity, in respect of its obligations arising out of the Fiscal Agency
Agreement and the transactions contemplated hereby. Without limiting the
foregoing, PDVSA Finance hereby expressly and irrevocably waives (and agrees not
to plead or claim or raise as a defense) any sovereign immunity under the
Foreign Sovereign Immunities Act of 1976, as amended, 28 U.S.C. ss.ss. 1602-1611
from (i) any action or proceeding in any Federal or state court in the United
States arising out of the Fiscal Agency Agreement and the transactions
contemplated thereby and (ii) attachment prior to judgment, attachment in aid of
execution, or execution of a judgment arising out of the Fiscal Agency Agreement
and the transactions contemplated thereby against the revenues, assets or
properties of PDVSA Finance located in the United States.
6
<PAGE>
IN WITNESS HEREOF, PDVSA Finance has caused this Instrument to
be duly executed.
PDVSA FINANCE LTD.
Address: Caledonian Bank & Trust Ltd.
Caledonian House
Mary Street, P.O. Box 1043
George Town, Grand Cayman
Cayman Islands
Attn:
Telecopier:
By: /s/ Mark P. Lewis
-------------------------
Name:
Title: Attorney-in-fact
7
<PAGE>
Exhibit A
Amortization Schedule
(in millions of US dollars)
Payment Principal Interest Balance after
Date Payment Payment Principal Payment
---- ------- ------- -----------------
8/15/99 $0.0 $0.48279000 $38.0
11/15/99 0.0 0.98752500 38.0
2/15/00 0.0 0.98752500 38.0
5/15/00 0.0 0.98752500 38.0
8/15/00 0.0 0.98752500 38.0
11/15/00 0.0 0.98752500 38.0
2/15/01 0.0 0.98752500 38.0
5/15/01 0.0 0.98752500 38.0
8/15/01 0.0 0.98752500 38.0
11/15/01 0.0 0.98752500 38.0
2/15/02 0.0 0.98752500 38.0
5/15/02 0.0 0.98752500 38.0
8/15/02 0.0 0.98752500 38.0
11/15/02 0.0 0.98752500 38.0
2/15/03 0.0 0.98752500 38.0
5/15/03 0.0 0.98752500 38.0
8/15/03 0.0 0.98752500 38.0
11/15/03 0.0 0.98752500 38.0
2/15/04 0.0 0.98752500 38.0
5/15/04 0.0 0.98752500 38.0
8/15/04 0.0 0.98752500 38.0
11/15/04 0.0 0.98752500 38.0
2/15/05 0.0 0.98752500 38.0
5/15/05 0.0 0.98752500 38.0
8/15/05 0.0 0.98752500 38.0
11/15/05 0.0 0.98752500 38.0
2/15/06 0.0 0.98752500 38.0
5/15/06 0.0 0.98752500 38.0
8/15/06 0.0 0.98752500 38.0
11/15/06 0.0 0.98752500 38.0
2/15/07 0.0 0.98752500 38.0
5/15/07 0.0 0.98752500 38.0
8/15/07 0.0 0.98752500 38.0
11/15/07 0.0 0.98752500 38.0
2/15/08 0.0 0.98752500 38.0
5/15/08 0.0 0.98752500 38.0
8/15/08 0.0 0.98752500 38.0
11/15/08 0.0 0.98752500 38.0
2/15/09 0.0 0.98752500 38.0
5/15/09 0.0 0.98752500 38.0
8/15/09 0.0 0.98752500 38.0
11/15/09 0.0 0.98752500 38.0
2/15/10 0.0 0.98752500 38.0
5/15/10 0.0 0.98752500 38.0
<PAGE>
Payment Principal Interest Balance after
Date Payment Payment Principal Payment
---- ------- ------- -----------------
8/15/10 0.0 0.98752500 38.0
11/15/10 0.0 0.98752500 38.0
2/15/11 0.0 0.98752500 38.0
5/15/11 0.0 0.98752500 38.0
8/15/11 0.0 0.98752500 38.0
11/15/11 0.0 0.98752500 38.0
2/15/12 0.0 0.98752500 38.0
5/15/12 0.0 0.98752500 38.0
8/15/12 4.75 0.98752500 33.25
11/15/12 4.75 0.86408438 28.50
2/15/13 4.75 0.74064375 23.75
5/15/13 4.75 0.61720313 19.00
8/15/13 4.75 0.49376250 14.25
11/15/13 4.75 0.37032188 9.50
2/15/14 4.75 0.24688125 4.75
5/15/14 4.75 0.12344063 0.0
Exhibit 12.1
PDV America, Inc. and Subsidiaries
Computation of Ratio of Earnings to Fixed Charges
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------------------------------------------
1999 1998 1997 1996 1995
---------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Income before provision for income taxes 200,415 361,703 334,185 215,781 226,482
Distributions in excess of equity in
earnings of affiliates 82,847 46,180 33,506 - -
Equity earnings (losses) in excess of
distributions - - - (8,672) (19,090)
Interest 165,351 180,241 209,465 194,362 186,546
Amortization of previously
capitalized interest 3,076 2,858 4,115 3,600 3,440
Portion of rent representative of
interest factor 11,667 11,333 13,000 11,000 10,928
------- ------- ------- ------- -------
Total earnings 483,356 602,315 594,271 416,071 408,306
======= ======= ======= ======= =======
Fixed charges
Interest expenses 165,351 180,241 209,465 194,362 186,546
Capitalized interest 7,000 5,000 7,800 12,000 5,000
Portion of rent representative of
interest factor 11,667 11,333 13,000 11,000 10,928
------- ------- ------- ------- -------
Total fixed charges 184,018 196,574 230,265 217,362 202,474
======= ======= ======= ======= =======
Ratio of earnings to fixed charges 2.52 x 3.06 x 2.58 x 1.91 x 2.02 x
</TABLE>
Exhibit 21.1
List of PDV America, Inc. Subsidiaries
Subsidiary Jurisdiction
- ---------- ------------
CITGO Petroleum Corporation........................................Delaware
Cit-Con Oil Corporation.......................................Delaware
CITGO Canada Petroleum Corporation............................Delaware
CITGO Funding Corporation.....................................Delaware
CITGO Funding Corporation II..................................Delaware
CITGO Gulf Coast Refining, Inc................................Delaware
CITGO International Marketing, Inc............................Delaware
CITGO International Supply Company............................Delaware
Champlin Corporation..........................................Delaware
CITGO Puerto Rico Petroleum Corporation.......................Delaware
CITGO Venezuela Supply Company................................Delaware
CITGO Refining Investment Company.............................Oklahoma
Trimark Insurance Company Ltd.................................Bermuda
CITGO Investment Company......................................Delaware
Cumene Associates, Inc....................................Delaware
Texas Phenol Plant Limited Partnership...............Texas
CITGO Pipeline Investment Company.............................Delaware
CITGO Pipeline Company....................................Delaware
CITGO Products Pipeline Company...........................Delaware
Lafitte Gas Pipeline Company..............................Delaware
CITGO East Coast Oil Corporation..............................Delaware
CITGO Asphalt Refining Company................................New Jersey
TCP Petcoke Corporation.......................................Delaware
TCP Venezuela, Inc............................................Delaware
CITGO Refining and Chemicals Company L.P......................Delaware
PDV USA, Inc. .....................................................Delaware
VPHI Midwest, Inc..................................................Delaware
PDV Midwest Refining, L.L.C...................................Delaware
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from PDV America,
Inc.'s financial statements for the period ending December 31, 1999
</LEGEND>
<CIK> 0000906422
<NAME> PDV America, Inc.
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 113,414
<SECURITIES> 0
<RECEIVABLES> 1,087,918
<ALLOWANCES> 18,226
<INVENTORY> 1,097,923
<CURRENT-ASSETS> 2,547,978
<PP&E> 4,547,081
<DEPRECIATION> 1,129,266
<TOTAL-ASSETS> 7,745,566
<CURRENT-LIABILITIES> 1,851,502
<BONDS> 2,010,223
0
0
<COMMON> 1
<OTHER-SE> 2,718,288
<TOTAL-LIABILITY-AND-EQUITY> 7,745,566
<SALES> 13,331,832
<TOTAL-REVENUES> 13,410,288
<CGS> 12,807,227
<TOTAL-COSTS> 13,044,371
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 15,110
<INTEREST-EXPENSE> 165,351
<INCOME-PRETAX> 200,415
<INCOME-TAX> 58,230
<INCOME-CONTINUING> 142,185
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 142,185
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
